WWW.EXFILE.COM, INC. -- 14195 -- HARSCO CORPORATION -- FORM 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-K
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended December
31, 2005
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from _________ to _________
Commission
file number 1-3970
___________________
HARSCO
CORPORATION
(Exact
name of Registrant as specified in its Charter)
Delaware
|
|
23-1483991
|
(State
or other jurisdiction of
|
|
(I.R.S.
employer identification number)
|
incorporation
or organization)
|
|
|
|
|
|
350
Poplar Church Road, Camp Hill, Pennsylvania
|
|
17011
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code
717-763-7064
Securities
registered pursuant to Section 12(b) of the Act:
|
Name
of each
|
Title
of each class
|
exchange
on which registered
|
Common
stock, par value $1.25 per share
|
New
York Stock Exchange and
|
Preferred
stock purchase rights
|
Pacific
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES x
NO
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o
NO
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES x
NO
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES
o NO
x
The
aggregate market value of the Company's voting stock held by non-affiliates
of
the Company as of June 30, 2005 was $2,271,446,562.
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
Classes
|
Outstanding
at February 28,
2006
|
Common
stock, par value $1.25 per share
|
41,835,886
|
DOCUMENTS
INCORPORATED BY REFERENCE
Selected
portions of the 2006 Proxy Statement are incorporated by reference into Part
III
of this Report.
The
Exhibit Index (Item No. 15) located on pages 94 to 98 incorporates several
documents by reference as indicated therein.
HARSCO
CORPORATION AND SUBSIDIARY COMPANIES
PART
I
(a)
General Development of Business
Harsco
Corporation ("the Company") is a diversified, multinational provider of
market-leading industrial services and engineered products. The Company's
operations fall into three reportable segments: Mill Services, Access Services
and Gas Technologies, plus an “all other” category labeled Engineered Products
and Services. The Company has locations in 45 countries, including the United
States. The Company was incorporated in 1956.
The
Company’s executive offices are located at 350 Poplar Church Road, Camp Hill,
Pennsylvania 17011. The Company’s main telephone number is (717) 763-7064. The
Company’s Internet website address is www.harsco.com.
Through
this Internet website (found in the "Investor Relations" link) the Company
makes
available, free of charge, its Annual Report on Form 10-K, Quarterly Reports
on
Form 10-Q and Current Reports on Form 8-K and all amendments to those reports,
as soon as reasonably practicable after these reports are electronically filed
or furnished to the Securities and Exchange Commission. Information contained
on
the Company’s website is not incorporated by reference into this Annual Report,
and you should not consider information contained on the Company’s website as
part of this Annual Report.
The
Company’s principal lines of business and related principal business drivers are
as follows:
Principal
Lines of Business
|
Principal
Business Drivers
|
|
|
· Outsourced,
on-site mill services under long-term contracts
|
· Steel
mill production and capacity utilization
· Outsourcing
of services
|
· Scaffolding,
forming, shoring and other access-related services, rentals and sales
|
· Non-residential
construction
· Annual
industrial and building maintenance cycles
|
· Railway
track maintenance services and equipment
|
· Domestic
and international railway track maintenance-of-way capital
spending
· Outsourcing
of track maintenance and new track construction by
railroads
|
· Industrial
grating products
|
· Industrial
production
· Non-residential
construction
|
· Industrial
abrasives and roofing granules
|
· Industrial
and infrastructure surface preparation and restoration
· Residential
roof replacement
|
· Powder
processing equipment and heat transfer products
|
· Pharmaceutical,
food and chemical production
· Commercial
and institutional boiler requirements
|
· Air-cooled
heat exchangers
|
· Natural
gas drilling and transmission
|
· Gas
control and containment products
|
|
-
Cryogenic containers and industrial cylinders
|
· General
industrial production and industrial gas production
|
-
Valves
|
· Use
of industrial fuel and refrigerant gases
· Respiratory
care market
· Consumer
barbeque grills market
|
-
Propane Tanks
|
· Use
of propane as a primary and/or backup fuel
|
-
Filament-wound composite cylinders
|
· Self-contained
breathing apparatus (SCBA) market
· Natural
gas vehicle (NGV) market
|
The
Company reports segment information using the “management approach” in
accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information” (SFAS 131). This approach is based on the way management
organizes and reports the segments within the enterprise for making operating
decisions and assessing performance. The Company’s reportable segments are
identified based upon differences in products, services and markets served.
These segments and the types of products and services offered are more fully
described below. Historical information has been reclassified for comparative
purposes.
In
2005,
2004 and 2003, the United States contributed sales of $1.2 billion, $1.0 billion
and $0.9 billion, equal to 42%, 42% and 43% of total sales, respectively. In
2005, 2004 and 2003, the United Kingdom contributed sales of $0.5 billion each
year, equal to 20%, 21% and 21% of total sales, respectively. No single customer
represented 10% or more of the Company's sales during 2005, 2004 and 2003.
There
were no significant inter-segment sales.
(b)
Financial Information about Segments
Financial
information concerning industry segments is included in Note 14, Information
by
Segment and Geographic Area, to the Consolidated Financial Statements under
Part
II, Item 8, "Financial Statements and Supplementary Data."
(c)
Narrative Description of Business
(1) A
narrative description of the businesses by reportable segment is as
follows:
Mill
Services Segment - 38% of consolidated sales for 2005
The
Mill
Services Segment, which consists of the MultiServ Division, is the Company’s
largest operating segment in terms of revenues and operating income. MultiServ
is the world’s largest provider of on-site, outsourced mill services to the
global steel and metals industries. MultiServ provides its services on a
long-term contract basis, supporting each stage of the metal-making process
from
initial raw material handling to post-production by-product processing and
on-site recycling. Working as a specialized, high-value-added services provider,
MultiServ rarely takes ownership of its customers’ raw materials or finished
products. Similar services are provided to the producers of non-ferrous metals,
such as aluminum, copper and nickel. The Company’s multi-year Mill Services
contracts had estimated future revenues of $4.3 billion at December 31, 2005.
This provides the Company with a substantial base of long-term revenues.
Approximately 58% of these revenues are expected to be recognized by December
31, 2008. The remaining revenues are expected to be recognized between January
1, 2009 and December 31, 2014.
MultiServ’s
geographic reach to over 30 countries, and its increasing range of services,
enhance the Company’s financial and operating balance. In 2005, this Segment’s
revenues were generated in the following regions:
|
Mill
Services Segment
|
|
|
2005
Percentage
|
|
Region
|
of
Revenues
|
|
|
|
|
Europe
|
49%
|
|
North
America
|
23%
|
|
Latin
America (a)
|
12%
|
|
Asia/Pacific
|
8%
|
|
Middle
East and Africa
|
8%
|
(a)
Including Mexico.
For
2005,
2004 and 2003, the Mill Services Segment’s percentage of consolidated sales was
38%, 40% and 39%, respectively.
Access
Services Segment - 29% of consolidated sales for 2005
The
Access Services Segment includes the Company’s SGB Group, Hünnebeck Group GmbH
and Patent Construction Systems Divisions. The Company’s Access Services Segment
leads the access industry as one of the world’s most complete providers of
scaffolding, shoring, forming and other access solutions. The U.K.-based SGB
Group Division operates from a network of international branches throughout
Europe, the Middle East and Asia/Pacific; the Germany-based Hünnebeck Division
serves Europe and the Middle East, while the U.S.-based Patent Construction
Systems Division serves the Americas. Major services include the rental and
sale
of scaffolding,
powered
access equipment, shoring and concrete forming products. The Company also
provides access design engineering services, on-site installation and
dismantling services, and a variety of other access equipment services. These
businesses serve principally the non-residential construction and industrial
maintenance markets.
The
Company’s access services are provided through branch locations in approximately
27 countries. In 2005, this Segment’s revenues were generated in the following
regions:
|
Access
Services Segment
|
|
|
2005
Percentage
|
|
Region
|
of
Revenues
|
|
|
|
|
Europe
|
67%
|
|
North
America
|
22%
|
|
Middle
East and Africa
|
9%
|
|
Asia/Pacific
|
2%
|
For
2005,
2004 and 2003, the Access Services Segment’s percentage of consolidated sales
was 29%, 28% and 29%, respectively.
Gas
Technologies Segment - 13% of consolidated sales for 2005
The
Gas
Technologies Segment includes the Company’s Harsco GasServ Division. The
Segment’s manufacturing and service facilities in the United States, Europe,
Australia, Malaysia and China comprise an integrated manufacturing network
for
gas containment and control products. This global operating presence and product
breadth provide economies of scale and multiple code production capability,
enabling Harsco GasServ to serve as a primary source to the world’s leading
industrial gas producers and distributors, as well as regional and local
customers. In 2005, approximately 86% of this Segment’s revenues were generated
in the United States.
The
Company’s gas containment products include cryogenic gas storage tanks; high
pressure and acetylene cylinders; propane tanks; and composite vessels for
industrial and commercial gases, natural gas vehicles (NGV) and other products.
The Company’s gas control products include valves and regulators serving a
variety of markets, including the industrial gas, commercial refrigeration,
life
support and outdoor recreation industries.
For
2005,
2004 and 2003, the Gas Technologies Segment’s percentage of consolidated sales
was 13%, 14% and 14%, respectively.
Engineered
Products and Services (“all other”) Category - 20% of consolidated sales for
2005
The
Engineered Products and Services (“all other”) Category includes the Harsco
Track Technologies, Reed Minerals, IKG Industries, Patterson-Kelley and
Air-X-Changers Divisions. Approximately 87% of this category’s revenues
originate in the United States.
Export
sales for this Category totaled $116.6 million, $101.2 million and $71.1 million
in 2005, 2004 and 2003, respectively. In 2005, 2004 and 2003 export sales for
the Harsco Track Technologies Division were $80.0 million, $76.3 million and
$52.8 million, respectively, which included sales to Europe, Asia, the Middle
East and Africa.
Harsco
Track Technologies is a global provider of equipment and services to maintain,
repair and construct railway track. The Company's railway track maintenance
services provide high-technology comprehensive track maintenance and new track
construction support to railroad customers worldwide. The railway track
maintenance equipment product class includes specialized track maintenance
equipment used by private and government-owned railroads and urban transit
systems worldwide.
Reed
Minerals’ roofing granules and industrial abrasives are produced from utility
coal slag at a number of locations throughout the United States. The Company's
Black Beauty® abrasives are used for industrial surface preparation, such as
rust removal and cleaning of bridges, ship hulls and various structures. Roofing
granules are sold to residential roofing shingle manufacturers, primarily for
the replacement market. This Division is the United States’ largest manufacturer
of slag abrasives and third largest manufacturer of residential roofing
granules.
IKG
Industries manufactures a varied line of industrial grating products at several
plants in North America. These products include a full range of bar grating
configurations, which are used mainly in industrial flooring, safety and
security applications in the power, paper, chemical, refining and processing
industries.
Patterson-Kelley
is a leading manufacturer of powder processing equipment such as blenders,
dryers and mixers for the chemical, pharmaceutical and food processing
industries and heat transfer products such as water heaters and boilers for
commercial and institutional applications.
Air-X-Changers
is a leading supplier of custom-designed and manufactured air-cooled heat
exchangers for the natural gas industry. The Company’s heat exchangers are the
primary apparatus used to condition natural gas during recovery, compression
and
transportation from underground reserves through the major pipeline distribution
channels.
For
2005,
2004 and 2003, the Engineered Products and Services (“all other”) Category’s
percentage of consolidated sales was 20%, 18% and 18%,
respectively.
|
(1)
(i) |
The
products and services of the Company include a number of product
groups.
These product groups are more fully discussed in Note 14, Information
by
Segment and Geographic Area, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data.” The
product groups that contributed 10% or more as a percentage of
consolidated sales in any of the last three fiscal years are set
forth in
the following table:
|
|
|
Percentage
of Consolidated Sales
|
|
Product
Group
|
2005
|
2004
|
2003
|
|
Mill
Services
|
38%
|
40%
|
39%
|
|
Access
Services
|
29%
|
28%
|
29%
|
|
Industrial
Gas Products
|
13%
|
14%
|
14%
|
|
(1)
(ii) |
New
products and services are added from time to time; however, in 2005
none
required the investment of a material amount of the Company's
assets.
|
|
(1)
(iii) |
The
manufacturing requirements of the Company's operations are such that
no
unusual sources of supply for raw materials are required. The raw
materials used by the Company include principally steel and, to a
lesser
extent, aluminum, which are usually readily available. The profitability
of the Company’s manufactured products are affected by changing purchase
prices of steel and other materials and commodities. Beginning in
2004,
the price paid for steel and certain other commodities increased
significantly compared with prior years. In 2005, the cost increases
moderated for certain commodities. However, if steel or other material
costs associated with the Company’s manufactured products increase and the
costs cannot be passed on to the Company’s customers, operating income
would be adversely affected. Additionally, decreased availability
of steel
or other materials, such as carbon fiber used to manufacture
filament-wound composite cylinders, could affect the Company’s ability to
produce manufactured products in a timely manner. If the Company
cannot obtain the necessary raw materials for its manufactured products,
then revenues, operating income and cash flows will be adversely
affected.
|
|
(1)
(iv) |
While
the Company has a number of trademarks, patents and patent applications,
it does not consider that any material part of its business is dependent
upon them.
|
|
(1)
(v) |
The
Company furnishes products and materials and certain industrial services
within the Access Services and Gas Technologies Segments and the
Engineered Products and Services (“all other”) Category that are seasonal
in nature. As a result, the Company’s sales and net income for the first
quarter ending March 31 are normally lower than the second, third
and
fourth quarters. Additionally, the Company has historically generated
the
majority of its cash flows in the third and fourth quarters (periods
ending September 30 and December 31). This is a direct result of
normally
higher sales and income during the latter part of the year. The Company’s
historical revenue patterns and cash provided by operating activities
were
as follows:
|
Historical
Revenue Patterns
|
In
millions
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter Ended March 31
|
|
$
|
640.1
|
|
$
|
556.3
|
|
$
|
487.9
|
|
$
|
458.6
|
|
$
|
505.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter Ended June 30
|
|
|
696.1
|
|
|
617.6
|
|
|
536.4
|
|
|
510.3
|
|
|
510.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter Ended September 30
|
|
|
697.5
|
|
|
617.3
|
|
|
530.2
|
|
|
510.5
|
|
|
510.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter Ended December 31
|
|
|
732.5
|
|
|
710.9
|
|
|
564.0
|
|
|
497.3
|
|
|
499.7
|
|
|
Totals
|
|
$
|
2,766.2
|
|
$
|
2,502.1
|
|
$
|
2,118.5
|
|
$
|
1,976.7
|
|
$
|
2,025.2
(a
|
)
|
(a)Does
not
total due to rounding.
Historical
Cash Provided by Operations
|
In
millions
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter Ended March 31
|
|
$
|
48.1
|
|
$
|
32.4
|
|
$
|
31.2
|
|
$
|
9.0
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter Ended June 30
|
|
|
86.3
|
|
|
64.6
|
|
|
59.2
|
|
|
71.4
|
|
|
65.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter Ended September 30
|
|
|
98.1
|
|
|
68.9
|
|
|
64.1
|
|
|
83.3
|
|
|
66.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter Ended December 31
|
|
|
82.7
|
|
|
104.6
|
|
|
108.4
|
|
|
90.1
|
|
|
106.9
|
|
|
Totals
|
|
$
|
315.3
(a
|
)
|
$
|
270.5
|
|
$
|
262.8
(a
|
)
|
$
|
253.8
|
|
$
|
240.6
(a
|
)
|
(a)Does
not
total due to rounding.
|
(1)
(vi) |
The
practices of the Company relating to working capital are similar
to those
practices of other industrial service providers or manufacturers
servicing
both domestic and international industrial services and commercial
markets. These practices include the
following:
|
· |
Standard
accounts receivable payment terms of 30 days to 60 days, with progress
payments required for certain long-lead-time or large
orders.
|
· |
Standard
accounts payable payment terms of 30 days to 90 days.
|
· |
Inventories
are maintained in sufficient quantities to meet forecasted demand.
Due to
the time required to manufacture certain railway maintenance equipment
to
customer specifications, inventory levels of this business tend to
increase during the production phase and then decline when the equipment
is sold.
|
|
(1)
(vii) |
The
Company as a whole is not dependent upon any one customer for 10%
or more
of its revenues. However, the Mill Services Segment is dependent
largely
on the global steel industry and in 2005, there were three customers
that
each provided in excess of 10% of this segment’s revenues under multiple
long-term contracts at several mill sites, compared with two such
customers for the years 2004 and 2003. The loss of any one of the
contracts would not have a material adverse effect upon the Company’s
financial position or cash flows; however, it could have a material
effect
on quarterly or annual results of operations. Additionally, these
customers have significant accounts receivable balances. In December
2005,
the Company acquired the Northern Hemisphere mill services operations
of
Brambles Industrial Services (“BISNH”). This acquisition has increased the
Company’s corresponding concentration of credit risk to these customers.
Further consolidation in the global steel industry is also
possible. Should transactions occur involving some of the steel
industry’s larger companies that are customers of the Company, it would
result in an increase in concentration of credit risk for the Company.
If
a large customer were to experience financial difficulty, or file
for
bankruptcy protection, it could adversely impact the Company’s income,
cash flows and asset valuations. In an effort to mitigate the increased
concentration of credit risk, the Company is considering the purchase
of
credit insurance for part of its receivable portfolio.
|
|
(1)
(viii) |
Backlog
of orders was $275.8 million and $243.0 million as of December 31,
2005
and 2004, respectively. It is expected that approximately 32% of
the total
backlog at December 31, 2005 will not be filled during 2006. The
Company’s
backlog is seasonal in nature and tends to follow in the same pattern
as
sales and net income which is discussed in section (1) (v) above.
Backlog
for scaffolding, shoring and forming services and for roofing granules
and
slag abrasives is not included in the total backlog because it is
generally not quantifiable, due to the timing and nature of the products
and services provided. Contracts for the Mill
|
|
|
Services
Segment are also excluded from the total backlog. These contracts
have
estimated future revenues of $4.3 billion at December 31, 2005.
For
additional information regarding backlog, see the Backlog section
included
in Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.”
|
|
(1)
(ix) |
At
December 31, 2005, the Company had no material contracts that were
subject
to renegotiation of profits or termination at the election of the
U.S.
Government.
|
|
(1)
(x) |
The
Company encounters active competition in all of its activities from
both
larger and smaller companies who produce the same or similar products
or
services, or who produce different products appropriate for the same
uses.
|
|
(1)
(xi) |
The
expense for product development activities was $2.7 million, $2.6
million
and $3.3 million in 2005, 2004 and 2003, respectively. For additional
information regarding product development activities, see the Research
and
Development section included in Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.”
|
|
(1)
(xii) |
The
Company has become subject, as have others, to stringent air and
water
quality control legislation. In general, the Company has not experienced
substantial difficulty complying with these environmental regulations
in
the past, and does not anticipate making any material capital expenditures
for environmental control facilities. While the Company expects that
environmental regulations may expand, and that its expenditures for
air
and water quality control will continue, it cannot predict the effect
on
its business of such expanded regulations. For additional information
regarding environmental matters see Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements included
in Part
II, Item 8, "Financial Statements and Supplementary
Data."
|
|
(1)
(xiii) |
As
of December 31, 2005, the Company had approximately 21,000
employees.
|
(d)
Financial Information about Geographic Areas
Financial
information concerning foreign and domestic operations is included in Note
14,
Information by Segment and Geographic Area, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
Export sales totaled $171.0 million, $139.3 million and $108.5 million in 2005,
2004 and 2003, respectively.
(e)
Available Information
Information
is provided in Part I, Item 1 (a), “General Development of
Business.”
Item
1A. Risk
Factors
Market
risk.
In
the
normal course of business, the Company is routinely subjected to a variety
of
risks. In addition to the market risk associated with interest rate and currency
movements on outstanding debt and non-U.S. dollar-denominated assets and
liabilities, other examples of risk include collectibility of receivables,
volatility of the financial markets and their effect on pension plans, and
global economic and political conditions.
Cyclical
industry and economic conditions may adversely affect the Company’s
businesses.
The
Company’s businesses are subject to general economic slowdowns and cyclical
conditions in the industries served. In particular,
· |
The
Company’s Mill Services business may be adversely impacted by slowdowns in
steel mill production, excess capacity, consolidation or bankruptcy
of
steel producers or a reversal or slowing of current outsourcing trends
in
the steel industry;
|
· |
The
Company’s Access Services business may be adversely impacted by slowdowns
in non-residential construction and annual industrial and building
maintenance cycles;
|
· |
The
railway track maintenance business may be adversely impacted by
developments in the railroad industry that lead to lower capital
spending
or reduced maintenance spending;
|
· |
The
industrial abrasives and roofing granules business may be adversely
impacted by reduced home resales or economic conditions that slow
the rate
of residential roof replacement, or by slowdowns in the industrial
and
infrastructure refurbishment industries;
|
· |
The
industrial grating business may be adversely impacted by slowdowns
in
non-residential construction and industrial production;
|
· |
The
Air-X-Changers business is affected by cyclical conditions present
in the
natural gas industry. A high demand for natural gas is currently
creating
increased demand for the Company’s air-cooled heat exchangers. However, a
slowdown in natural gas production could adversely affect the
Air-X-Changers business; and
|
· |
The
Company’s Gas Technologies business may be adversely impacted by reduced
industrial production and lower demand for industrial gases, slowdowns
in
demand for medical cylinders, valves and consumer barbecue grills,
or
lower demand for natural gas
vehicles.
|
The
Company’s defined benefit pension expense is directly affected by the equity and
bond markets and a downward trend in those markets could adversely impact the
Company’s future earnings. An upward trend in the equity and bond markets could
positively affect the Company’s future earnings.
In
addition to the economic issues that directly affect the Company’s businesses,
changes in the performance of equity and bond markets, particularly in the
United Kingdom and the United States, impact actuarial assumptions used in
determining annual pension expense, pension liabilities and the valuation of
the
assets in the Company’s defined benefit pension plans. The downturn in financial
markets during 2000, 2001 and 2002 negatively impacted the Company’s pension
expense and the accounting for pension assets and liabilities. This resulted
in
an increase in pre-tax defined benefit pension expense from continuing
operations of approximately $20.8 million for calendar year 2002 compared with
2001 and $17.7 million for calendar year 2003 compared with 2002. The upturn
in
certain financial markets beginning in 2003 and certain plan design changes
(discussed below) contributed to a decrease in pre-tax defined benefit pension
expense from continuing operations of approximately $3.8 million for 2005
compared with 2004, and approximately $5.4 million for 2004 compared with 2003.
An upward trend in capital markets would likely result in a decrease in future
unfunded obligations and pension expense. This could also result in an increase
to Stockholders’ Equity and a decrease in the Company’s statutory funding
requirements. If the financial markets deteriorate, it would most likely have
a
negative impact on the Company’s pension expense and the accounting for pension
assets and liabilities. This could result in a decrease to Stockholders’ Equity
and an increase in the Company’s statutory funding requirements.
In
response to the adverse market conditions, during 2002 and 2003 the Company
conducted a comprehensive global review of its pension plans in order to
formulate a plan to make its long-term pension costs more predictable and
affordable. The Company implemented design changes for most of these plans
during 2003. The principal change involved converting future pension benefits
for many of the Company’s non-union employees in both the U.K. and U.S. from
defined benefit plans to defined contribution plans as of January 1, 2004.
This
conversion is expected to make the Company’s pension expense more predictable
and affordable and less sensitive to changes in the financial markets.
The
Company’s pension committee continues to evaluate alternative strategies to
further reduce overall pension expense including the on-going evaluation of
investment fund managers’ performance; the balancing of plan assets and
liabilities; the risk assessment of all multi-employer pension plans; the
possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that are likely to reduce
future pension expense volatility and minimize risk.
The
Company’s global presence subjects it to a variety of risks arising from doing
business internationally.
The
Company operates in 45 countries, including the United States. The Company’s
global footprint
exposes
it to a variety of risks that may adversely affect results of operations, cash
flows or financial position. These include the following:
· |
periodic
economic downturns in the countries in which the Company does business;
|
· |
fluctuations
in currency exchange rates;
|
· |
customs
matters and changes in trade policy or tariff regulations;
|
· |
imposition
of or increases in currency exchange controls and hard currency shortages;
|
· |
changes
in regulatory requirements in the countries in which the Company
does
business;
|
· |
higher
tax rates and potentially adverse tax consequences including restrictions
on repatriating earnings, adverse tax withholding requirements and
"double
taxation'';
|
· |
longer
payment cycles and difficulty in collecting accounts receivable;
|
· |
complications
in complying with a variety of international laws and regulations;
|
· |
political,
economic and social instability, civil unrest and armed hostilities
in the
countries in which the Company does business;
|
· |
inflation
rates in the countries in which the Company does business;
|
· |
laws
in various international jurisdictions that limit the right and ability
of
subsidiaries to pay dividends and remit earnings to affiliated companies
unless specified conditions are met; and‚
|
· |
uncertainties
arising from local business practices, cultural considerations and
international political and trade tensions.
|
If
the
Company is unable to successfully manage the risks associated with its global
business, the Company’s financial condition, cash flows and results of
operations may be negatively affected.
The
Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq and other countries with a continued high risk
of
armed hostilities. During 2005, 2004 and 2003, these countries contributed
approximately $32.7 million, $25.5 million and $16.4 million, respectively,
to
the Company’s operating income. Additionally, the Company has operations in and
sales to countries that have encountered outbreaks of communicable diseases
(e.g., Acquired Immune Deficiency Syndrome (AIDS) and others). Should such
outbreaks worsen or spread to other countries, the Company may be negatively
impacted through reduced sales to and within those countries and other countries
impacted by such diseases.
Exchange
rate fluctuations may adversely impact the Company’s
business.
Fluctuations
in foreign exchange rates between the U.S. dollar and the approximately 40
other
currencies in which the Company conducts business may adversely impact the
Company’s operating income and income from continuing operations in any given
fiscal period. Approximately 58% of the Company’s sales and approximately 67%
and 69% of the Company’s operating income from continuing operations for the
years ended December 31, 2005 and 2004, respectively, were derived from
operations outside the United States. More specifically, during both 2005 and
2004, approximately 20% and 21%, respectively, of the Company’s revenues were
derived from operations in the U.K. Additionally, approximately 18% and 17%
of
the Company’s revenues were derived from operations with the euro as their
functional currency during 2005 and 2004, respectively. Given the structure
of
the Company’s revenues and expenses, an increase in the value of the U.S. dollar
relative to the foreign currencies in which the Company earns its revenues
generally has a negative impact on operating income, whereas a decrease in
the
value of the U.S. dollar tends to have the opposite effect. The Company’s
principal foreign currency exposures are to the British pound sterling and
the
euro, and the exposure to these currencies, as well as other foreign currencies,
is expected to increase in 2006 due to the fourth quarter acquisitions of
Hünnebeck and the Northern Hemisphere mill services operations of Brambles
Industrial Services (“BISNH”).
Compared
with the corresponding period in 2004, the average values of major currencies
changed as follows in relation to the U.S. dollar during 2005, impacting the
Company’s sales and income:
|
•
|
British
pound sterling
|
Weakened
by 1%
|
|
•
|
euro
|
Neutral
|
|
•
|
South
African rand
|
Neutral
|
|
•
|
Brazilian
real
|
Strengthened
by 17%
|
|
•
|
Australian
dollar
|
Strengthened
by 3%
|
Compared
with exchange rates at December 31, 2004, the values of major currencies changed
as follows as of December 31, 2005:
|
•
|
British
pound sterling
|
Weakened
by 10%
|
|
•
|
euro
|
Weakened
by 13%
|
|
•
|
South
African rand
|
Weakened
by 11%
|
|
•
|
Brazilian
real
|
Strengthened
by 14%
|
|
•
|
Australian
dollar
|
Weakened
by 6%
|
The
Company’s foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies change
materially in relation to the U.S. dollar, the Company’s financial position,
results of operations, or cash flows may be materially affected.
To
illustrate the effect of foreign currency exchange rate changes in certain
key
markets of the Company, in 2005, revenues would have been approximately 1%
or
$14.8 million less and operating income would have been approximately 1% or
$2.8
million less if the average exchange rates for 2004 were utilized. A similar
comparison for 2004 would have decreased revenues approximately 4% or $108.9
million, while operating income would have been approximately 4% or $8.1 million
less if the average exchange rates for 2004 would have remained the same as
2003. If the U.S. dollar weakens in relation to the euro and British pound
sterling, the Company would expect to see a positive impact on future sales
and
income from continuing operations as a result of foreign currency
translation.
Currency
changes result in assets and liabilities denominated in local currencies being
translated into U.S. dollars at different amounts than at the prior period
end.
These currency changes resulted in decreased net assets of $54.4 million at
December 31, 2005 when compared with December 31, 2004, and increased net assets
of $46.2 million at December 31, 2004 when compared with December 31, 2003.
The
Company seeks to reduce exposures to foreign currency transaction fluctuations
through the use of forward exchange contracts. At December 31, 2005, the
notional amount of these contracts was $157.9 million, and over 90% of these
contracts will mature within the first quarter of 2006. The Company does not
hold or issue financial instruments for trading purposes, and it is the
Company's policy to prohibit the use of derivatives for speculative purposes.
Although
the Company engages in foreign currency forward exchange contracts and other
hedging strategies to mitigate foreign exchange risk, hedging strategies may
not
be successful or may fail to offset the risk.
In
addition, competitive conditions in the Company’s manufacturing businesses may
limit the Company’s ability to increase product prices in the face of adverse
currency movements. Sales of products manufactured in the United States for
the
domestic and export markets may be affected by the value of the U.S. dollar
relative to other currencies. Any long-term strengthening of the U.S. dollar
could depress demand for these products and reduce sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts. Conversely, any long-term
weakening of the U.S. dollar could improve demand for these products and
increase sales and may cause translation gains or losses due to the revaluation
of accounts payable, accounts receivable and other asset and liability
accounts.
Negative
economic conditions may adversely impact the ability of the
Company’s customers
to meet their obligations to the Company on
a timely basis and impact the valuation of the Company’s
assets.
If
a
downturn in the economy occurs, it may adversely impact the ability of the
Company’s customers to meet their obligations to the Company on a timely basis
and could result in bankruptcy filings by them. If customers are unable to
meet
their obligations on a timely basis, it could adversely impact the realizability
of receivables, the valuation of inventories and the valuation of long-lived
assets across the Company’s businesses, as well as negatively affect the
forecasts used in performing the Company’s goodwill impairment testing under
SFAS No. 142, "Goodwill and Other Intangible Assets” (SFAS 142). If management
determines that goodwill or other assets are impaired or that inventories
or
receivables cannot be realized at recorded amounts, the Company will be required
to record a write-down in the period of determination, which will reduce net
income for that period. Additionally, the risk remains that certain Mill
Services customers may file for bankruptcy protection, be acquired or
consolidate in the future, which could have an adverse impact on the Company’s
income and cash flows. The potential financial impact of this risk has increased
with the Company’s acquisition of BISNH in December 2005. Conversely, such
consolidation may provide additional service opportunities for the
Company.
A
negative outcome on personal injury claims against the
Company may
adversely impact results of operations and financial
condition.
The
Company has been named as one of many defendants (approximately 90 or more
in
most cases) in legal actions alleging personal injury from exposure to airborne
asbestos. In their suits, the plaintiffs have named as defendants many
manufacturers, distributors and repairers of numerous types of equipment or
products that may involve asbestos. Most of these complaints contain a standard
claim for damages of $20 million or more against the named defendants. If the
Company was found to be liable in any of these actions and the liability was
to
exceed the Company’s insurance coverage, results of operations, cash flows and
financial condition could be adversely affected. For more information concerning
this litigation, see Note 10, Commitments and Contingencies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data.”
The
Company may lose customers or be required to reduce prices as a result of
competition.
The
industries in which the Company operates are highly competitive.
· |
The
Company’s Mill Services business is sustained mainly through contract
renewals. Historically, the Company’s contract renewal rate has averaged
approximately 95%. If the Company is unable to renew its contracts
at the
historical rates or renewals are at reduced prices, revenue may decline.
|
· |
The
Company’s Access Services business rents and sells equipment and provides
erection and dismantling services to principally the non-residential
construction and industrial plant maintenance markets. Contracts
are
awarded based upon the Company’s engineering capabilities, product
availability, safety record, and the ability to competitively price
its
rentals and services. Commencing in 2000, due to economic downturns
in
their home markets, certain international competitors exported significant
quantities of rental equipment to the markets the Company serves,
particularly the U.S. This resulted in an oversupply of certain equipment
and a consequential reduction in product and rental pricing in the
markets
receiving the excess equipment. The effect of these actions was mitigated,
to some extent, in 2005 due to a buoyant U.S. non-residential construction
market. However, if the Company is unable to consistently provide
high-quality products and services at competitive prices, it may
lose
customers or operating margins may decline due to reduced selling
prices.
|
· |
The
Company’s manufacturing businesses compete with companies that manufacture
similar products both internationally and domestically. Certain
international competitors export their products into the United States
and
sell them at lower prices due to lower labor costs and government
subsidies for exports. Such practices may limit the prices the Company
can
charge for its products and services. Additionally, unfavorable foreign
exchange rates can adversely impact the Company’s ability to match the
prices charged by international competitors. If the Company is unable
to
match the prices charged by international competitors, it may lose
customers.
|
The
Company’s strategy to overcome this competition includes continuous process
improvement and cost reduction programs, international customer focus and the
diversification, streamlining and consolidation of operations.
Increased
customer concentration and credit risk in the Mill Services Segment may
adversely affect the Company’s future earnings and cash
flows.
Concentrations
of credit risk with respect to accounts receivable are generally limited due
to
the Company’s large number of customers and their dispersion across different
industries and geographies. However, the Company’s Mill Services Segment
has several large customers throughout the world with significant accounts
receivable balances. In December 2005, the Company acquired BISNH. This
acquisition has increased the Company’s corresponding concentration of credit
risk to customers in the steel industry. Additionally, further
consolidation in the global steel industry is possible. Should
transactions occur involving some of the steel industry’s larger companies,
which are customers of the Company, it would result in an increase in
concentration of credit risk for the Company. If a large customer were to
experience financial difficulty, or file for bankruptcy protection, it could
adversely impact the Company’s income, cash flows and asset valuations. As part
of its credit risk management practices, the Company is developing strategies
to
mitigate this increased concentration of credit risk.
Increases
in energy prices could increase the Company’s operating costs and reduce its
profitability.
Worldwide
political and economic conditions, extreme weather conditions, among other
factors, may result in an increase in the volatility of energy costs, both
on a
macro basis and for the Company specifically. In 2005, 2004 and 2003, energy
costs have approximated 3.6%, 3.5% and 3.5% of the Company’s revenue,
respectively. To the extent that such costs cannot be passed to customers in
the
future, operating income and results of operations may be adversely affected.
Increases
or decreases in purchase prices or availability of steel or other materials
and
commodities may affect the Company’s profitability.
The
profitability of the Company’s manufactured products are affected by changing
purchase prices of steel and other materials and commodities. Beginning in
2004,
the price paid for steel and certain other commodities increased significantly
compared with prior years. In 2005, the cost increases moderated for certain
commodities. However, if steel or other material costs associated with the
Company’s manufactured products increase and the costs cannot be passed on to
the Company’s customers, operating income would be adversely affected.
Additionally, decreased availability of steel or other materials, such as carbon
fiber used to manufacture filament-wound composite cylinders, could affect
the
Company’s ability to produce manufactured products in a timely manner. If
the Company cannot obtain the necessary raw materials for its manufactured
products, then revenues, operating income and cash flows will be adversely
affected.
The
Company is subject to various environmental laws and the success of existing
or
future environmental claims against it could adversely affect the
Company’s results
of operations and cash flows.
The
Company’s operations are subject to various federal, state, local and
international laws, regulations and ordinances relating to the protection of
health, safety and the environment, including those governing discharges to
air
and water, handling and disposal practices for solid and hazardous wastes,
the
remediation of contaminated sites and the maintenance of a safe work place.
These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting
from past and current spills, disposals or other releases of, or exposure to,
hazardous materials. The Company could incur substantial costs as a result
of
non-compliance with or liability for remediation or other costs or damages
under
these laws. The Company may be subject to more stringent environmental laws
in
the future, and compliance with more stringent environmental requirements may
require the Company to make material expenditures or subject it to liabilities
that the Company currently does not anticipate.
The
Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party'' for certain waste disposal
sites under the federal "Superfund'' law. At several sites, the Company is
currently conducting environmental remediation, and it is probable that the
Company will agree to make payments toward funding certain other of these
remediation activities. It also is possible that some of these matters will
be
decided unfavorably to the Company and that other sites requiring remediation
will be identified. Each of these matters is subject to various uncertainties
and financial exposure is dependent upon such factors as the continuing
evolution of environmental laws and regulatory requirements, the availability
and application of technology, the allocation of cost among potentially
responsible parties, the years of remedial activity required and the remediation
methods selected. The Company has evaluated its potential liability and the
Consolidated Balance Sheets at December 31, 2005 and 2004 includes an accrual
of
$2.8 million and $2.7 million, respectively, for environmental matters. The
amounts charged against pre-tax earnings related to environmental matters
totaled $1.5 million, $2.1 million and $1.4 million for the years ended December
31, 2005, 2004 and 2003, respectively. The liability for future remediation
costs is evaluated on a quarterly basis. Actual costs to be incurred at
identified sites in future periods may be greater than the estimates, given
inherent uncertainties in evaluating environmental exposures.
Restrictions
imposed by the Company’s credit facilities and outstanding notes may limit the
Company’s ability to obtain additional financing or to pursue business
opportunities.
The
Company’s credit facilities and certain notes payable agreements contain a
covenant requiring a maximum debt to capital ratio of 60%. In addition, certain
notes payable agreements also contain a covenant requiring a minimum net worth
of $475 million. These covenants limit the amount of debt the Company may incur,
which could limit its ability to obtain additional financing or to pursue
business opportunities. In addition, the Company’s ability to comply with these
ratios may be affected by events beyond its control. A breach of any of these
covenants or the inability to comply with the required financial ratios could
result in a default under these credit facilities. In the event of any default
under these credit facilities, the lenders under those facilities could elect
to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, to be due and payable, which would cause an event of default
under the notes. This could, in turn, trigger an event of default under the
cross-default provisions of the Company’s other outstanding indebtedness. At
December 31, 2005, the Company was in compliance with these covenants with
a
debt to capital ratio
of
50.4%,
and a net worth of $993.9 million. The Company had $347.6 million in outstanding
indebtedness containing these covenants at December 31, 2005.
Higher
than expected claims under insurance policies, under which the Company retains
a
portion of the risk, could adversely impact results of operations and cash
flows.
The
Company retains a significant portion of the risk for property, workers'
compensation, U.K. employers’ liability, automobile, general and product
liability losses. Reserves have been recorded which reflect the undiscounted
estimated liabilities for ultimate losses including claims incurred but not
reported. Inherent in these estimates are assumptions that are based on the
Company’s history of claims and losses, a detailed analysis of existing claims
with respect to potential value, and current legal and legislative trends.
At
December 31, 2005 and 2004, the Company had recorded liabilities of $102.3
million and $77.4 million, respectively, related to both asserted and unasserted
insurance claims. Included in the balance at December 31, 2005 were $25.2
million of recognized liabilities covered by insurance carriers. There were
no
such liabilities recognized as of December 31, 2004 since there were no probable
claim amounts in excess of the Company’s deductible limits. If actual claims are
higher than those projected by management, an increase to the Company’s
insurance reserves may be required and would be recorded as a charge to income
in the period the need for the change was determined. Conversely, if actual
claims are lower than those projected by management, a decrease to the Company’s
insurance reserves may be required and would be recorded as a reduction to
expense in the period the need for the change was determined.
The
seasonality of the Company’s business may cause its quarterly results to
fluctuate.
The
Company has historically generated the majority of its cash flows in the third
and fourth quarters (periods ending September 30 and December 31). This is
a
direct result of normally higher sales and income during the latter part of
the
year, as the Company’s business tends to follow seasonal patterns. If the
Company is unable to successfully manage the cash flow and other effects of
seasonality on the business, its financial condition and results of operations
may be negatively affected. The Company’s historical revenue patterns and net
cash provided by operating activities are included in Part I, Item 1,
“Business.”
The
Company's cash flows and earnings are subject to changes in interest rates.
The
Company’s total debt as of December 31, 2005 was $1.0 billion. Of this amount,
approximately 49.5% had variable rates of interest and 50.5% had fixed rates
of
interest. The weighted average interest rate of total debt was approximately
5.3%. At current debt levels, a one-percentage increase/decrease in variable
interest rates would increase/decrease interest expense by approximately $5.0
million per year.
The
future financial impact on the Company associated with the above risks cannot
be
estimated.
Item
1B. Unresolved
Staff Comments
None.
Information
as to the principal plants owned and operated by the Company is summarized
in
the following table:
Location
|
Principal
Products
|
|
|
Access
Services Segment
|
|
Marion,
Ohio
|
Access
Equipment Maintenance
|
Dosthill,
United Kingdom
|
Access
Equipment Maintenance
|
Gas
Technologies Segment
|
|
Lockport,
New York
|
Valves
|
Niagara
Falls, New York
|
Valves
|
Washington,
Pennsylvania
|
Valves
|
Location
|
Principal
Products
|
Bloomfield,
Iowa
|
Propane
Tanks
|
Fremont,
Ohio
|
Propane
Tanks
|
Jesup,
Georgia
|
Propane
Tanks
|
West
Jordan, Utah
|
Propane
Tanks
|
Harrisburg,
Pennsylvania
|
High
Pressure Cylinders
|
Huntsville,
Alabama
|
High
Pressure Cylinders
|
Beijing,
China
|
Cryogenic
Storage Vessels
|
Jesup,
Georgia
|
Cryogenic
Storage Vessels
|
Kosice,
Slovakia
|
Cryogenic
Storage Vessels
|
Shah
Alam, Malaysia
|
Cryogenic
Storage Vessels
|
Theodore,
Alabama
|
Cryogenic
Storage Vessels
|
|
|
Engineered
Products and Services (“all other”) Category
|
|
Drakesboro,
Kentucky
|
Roofing
Granules/Abrasives
|
Gary,
Indiana
|
Roofing
Granules/Abrasives
|
Moundsville,
West Virginia
|
Roofing
Granules/Abrasives
|
Tampa,
Florida
|
Roofing
Granules/Abrasives
|
Brendale,
Australia
|
Railroad
Equipment
|
Fairmont,
Minnesota
|
Railroad
Equipment
|
Ludington,
Michigan
|
Railroad
Equipment
|
West
Columbia, South Carolina
|
Railroad
Equipment
|
Channelview,
Texas
|
Industrial
Grating Products
|
Leeds,
Alabama
|
Industrial
Grating Products
|
Queretaro,
Mexico
|
Industrial
Grating Products
|
East
Stroudsburg, Pennsylvania
|
Process
Equipment
|
Catoosa,
Oklahoma
|
Heat
Exchangers
|
The
Company also operates the following plants which are leased:
Location
|
Principal
Products
|
Access
Services Segment
|
|
DeLimiet,
Netherlands
|
Access
Equipment Maintenance
|
Ratingen,
Germany
|
Access
Equipment Maintenance
|
Gas
Technologies Segment
|
|
Cleveland,
Ohio
|
Brass
Castings
|
Pomona,
California
|
Composite
Cylinders
|
Engineered
Products and Services (“all other”) Category
|
|
Memphis,
Tennessee
|
Roofing
Granules/Abrasives
|
Eastwood,
United Kingdom
|
Railroad
Equipment
|
Tulsa,
Oklahoma
|
Industrial
Grating Products
|
Garrett,
Indiana
|
Industrial
Grating Products
|
Catoosa,
Oklahoma
|
Heat
Exchangers
|
Sapulpa,
Oklahoma
|
Heat
Exchangers
|
The
above
listing includes the principal properties owned or leased by the Company. The
Company also operates from a number of other smaller plants, branches, depots,
warehouses and offices in addition to the above. The Company considers all
of
its properties at which operations are currently performed to be in satisfactory
condition and suitable for operations.
Information
regarding legal proceedings is included in Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, Item
8,
"Financial Statements and Supplementary Data.”
There
were no matters that were submitted to a vote of security holders, through
the
solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this Report.
Supplementary
Item. Executive Officers of the Registrant (Pursuant to Instruction 3 to Item
401(b) of Regulation S-K)
Set
forth
below, as of March 13, 2006, are the executive officers (this excludes three
corporate officers who are not deemed "executive officers" within the meaning
of
applicable Securities and Exchange Commission regulations) of the Company and
certain information with respect to each of them. D. C. Hathaway, S. D.
Fazzolari and R. C. Neuffer were elected to their respective offices effective
January 24, 2006. G. D. H. Butler, M. E. Kimmel and S. J. Schnoor were elected
to their respective offices effective April 26, 2005. All terms expire on April
26, 2006. There are no family relationships between any of the executive
officers.
Name
|
Age
|
Principal
Occupation or Employment
|
|
|
|
Executive
Officers:
|
|
|
|
|
|
D.
C. Hathaway
|
61
|
Chairman
and Chief Executive Officer of the Corporation since January 24,
2006 and
from January 1, 1998 to July 31, 2000. Served as Chairman, President
and
Chief Executive Officer from April 1, 1994 to December 31, 1997
and from
July 31, 2000 to January 23, 2006 and as President and Chief Executive
Officer from January 1, 1994 to April 1, 1994. Director since 1991.
From
1991 to 1993, served as President and Chief Operating Officer.
From 1986
to 1991 served as Senior Vice President-Operations of the Corporation.
Served as Group Vice President from 1984 to 1986 and as President
of the
Dartmouth Division of the Corporation from 1979 until
1984.
|
|
|
|
S.
D. Fazzolari
|
53
|
President,
Chief Financial Officer and Treasurer of the Corporation effective
January
24, 2006 and Director since January 2002. Served as Senior Vice
President,
Chief Financial Officer and Treasurer from August 24, 1999 to January
23,
2006 and as Senior Vice President and Chief Financial Officer from
January
1998 to August 1999. Served as Vice President and Controller from
January
1994 to December 1997 and as Controller from January 1993 to January
1994.
Previously served as Director of Auditing from 1985 to 1993 and
served in
various auditing positions from 1980 to 1985.
|
|
|
|
G.
D. H. Butler
|
59
|
Senior
Vice President-Operations of the Corporation effective September
26, 2000
and Director since January 2002. Concurrently serves as President
of the
MultiServ and SGB Divisions. From September 2000 through December
2003, he
was President of the Heckett MultiServ International and SGB Divisions.
Was President of the Heckett MultiServ-East Division from July
1, 1994 to
September 26, 2000. Served as Managing Director - Eastern Region
of the
Heckett MultiServ Division from January 1, 1994 to June 30, 1994.
Served
in various officer positions within MultiServ International, N.
V. prior
to 1994 and prior to the Company’s acquisition of that corporation in
August 1993.
|
Name
|
Age
|
Principal
Occupation or
Employment
|
|
|
|
M.
E. Kimmel
|
46
|
General
Counsel and Corporate Secretary effective January 1, 2004. Served
as
Corporate Secretary and Assistant General Counsel from May 1, 2003
to
December 31, 2003. Held various legal positions within the Corporation
since he joined the Company in August 2001. Prior to joining Harsco,
he
was Vice President, Administration and General Counsel, New World
Pasta
Company from January 1, 1999 to July 2001. Before joining New World
Pasta,
Mr. Kimmel spent approximately 12 years in various legal positions
with
Hershey Foods Corporation.
|
|
|
|
S.
J. Schnoor
|
52
|
Vice
President and Controller of the Corporation effective May 15, 1998.
Served
as Vice President and Controller of the Patent Construction Systems
Division from February 1996 to May 1998 and as Controller of the
Patent
Construction Systems Division from January 1993 to February 1996.
Previously served in various auditing positions for the Corporation
from
1988 to 1993. Prior to joining Harsco, he served in various auditing
positions for Coopers & Lybrand from September 1985 to
April 1988.
|
|
|
|
R.
C. Neuffer
|
63
|
President
of the Engineered Products and Services business group since his
appointment on January 24, 2006. Previously, he led the Patterson-Kelley,
IKG Industries and Air-X-Changers units as Vice President and General
Manager since 2004. In 2003, he was Vice President and General
Manager of
IKG Industries and Patterson-Kelley. Between 1997 and 2002, he
was Vice
President and General Manager of Patterson-Kelley. Mr. Neuffer
joined
Harsco in 1991.
|
PART
II
Harsco
Corporation common stock is listed on the New York and Pacific Stock Exchanges,
and also trades on the Boston and Philadelphia Exchanges under the symbol HSC.
At the end of 2005, there were 41,783,176 shares outstanding. In 2005, the
Company’s common stock traded in a range of $49.87 to $70.57 and closed at
$67.51 at year-end. At December 31, 2005 there were approximately 17,400
stockholders. There are no significant limitations on the payment of dividends
included in the Company’s loan agreements. For additional information regarding
Harsco common stock market price and dividends declared, see Dividend Action
under Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and the Common Stock Price and Dividend
Information under Part II, Item 8, "Financial Statements and Supplementary
Data.” For additional information on the Company’s equity compensation plans see
Part III, Item 11, “Executive Compensation.”
(c). Issuer
Purchases of Equity Securities
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans or
Programs
|
Maximum
Number of
Shares
that May Yet
Be
Purchased Under
the
Plans or
Programs
|
|
|
|
|
|
October
1, 2005 - October 31, 2005
|
|
|
|
1,000,000
|
November
1, 2005 - November 30, 2005
|
|
|
|
1,000,000
|
December
1, 2005 - December 31, 2005
|
|
|
|
1,000,000
|
Total
|
|
|
|
|
The
Company’s share repurchase program was extended by Board of Directors in
November 2005. The program authorizes the repurchase of up to 1,000,000 shares
of the Company’s common stock and expires January 31, 2007.
Five-Year
Statistical Summary
(In
thousands, except per share, employee information and
percentages)
|
|
2005
(a)
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Income
Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from continuing operations
|
|
$
|
2,766,210
|
|
$
|
2,502,059
|
|
$
|
2,118,516
|
|
$
|
1,976,732
|
|
$
|
2,025,163
|
|
Income
from continuing operations
|
|
|
156,750
|
|
|
113,540
|
|
|
86,999
|
|
|
88,410
|
|
|
74,642
|
|
Income
(loss) from discontinued operations
|
|
|
(93
|
)
|
|
7,671
|
|
|
5,218
|
|
|
1,696
|
|
|
(2,917
|
)
|
Net
income
|
|
|
156,657
|
|
|
121,211
|
|
|
92,217
|
|
|
90,106
|
|
|
71,725
|
|
Financial
Position and Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
352,620
|
|
$
|
346,768
|
|
$
|
269,276
|
|
$
|
228,552
|
|
$
|
231,156
|
|
Total
assets
|
|
|
2,975,804
|
|
|
2,389,756
|
|
|
2,138,035
|
|
|
1,999,297
|
|
|
2,090,766
|
|
Long-term
debt
|
|
|
905,859
|
|
|
594,747
|
|
|
584,425
|
|
|
605,613
|
|
|
720,133
|
|
Total
debt
|
|
|
1,009,888
|
|
|
625,809
|
|
|
613,531
|
|
|
639,670
|
|
|
762,115
|
|
Depreciation
and amortization
|
|
|
198,065
|
|
|
184,371
|
|
|
168,935
|
|
|
155,661
|
|
|
176,531
|
|
Capital
expenditures
|
|
|
290,239
|
|
|
204,235
|
|
|
143,824
|
|
|
114,340
|
|
|
156,073
|
|
Cash
provided by operating activities
|
|
|
315,279
|
|
|
270,465
|
|
|
262,788
|
|
|
253,753
|
|
|
240,601
|
|
Cash
used by investing activities
|
|
|
(645,185
|
)
|
|
(209,602
|
)
|
|
(144,791
|
)
|
|
(53,929
|
)
|
|
(125,213
|
)
|
Cash
provided (used) by financing activities
|
|
|
369,325
|
|
|
(56,512
|
)
|
|
(125,501
|
)
|
|
(205,480
|
)
|
|
(99,190
|
)
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on sales(b)
|
|
|
5.7
|
%
|
|
4.5
|
%
|
|
4.1
|
%
|
|
4.5
|
%
|
|
3.7
|
%
|
Return
on average equity(c)
|
|
|
16.7
|
%
|
|
13.8
|
%
|
|
12.2
|
%
|
|
12.6
|
%
|
|
11.1
|
%
|
Current
ratio
|
|
|
1.5:1
|
|
|
1.6:1
|
|
|
1.5:1
|
|
|
1.5:1
|
|
|
1.5:1
|
|
Total
debt to total capital(d)
|
|
|
50.4
|
%
|
|
40.6
|
%
|
|
44.1
|
%
|
|
49.8
|
%
|
|
52.6
|
%
|
Per
Share Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic -
Income from continuing operations
|
|
$
|
3.76
|
|
$
|
2.76
|
|
$
|
2.14
|
|
$
|
2.19
|
|
$
|
1.87
|
|
-
Income (loss) from discontinued operations
|
|
|
—
|
|
|
0.19
|
|
|
0.13
|
|
|
0.04
|
|
|
(0.07
|
)
|
-
Net income
|
|
$
|
3.76
|
|
$
|
2.95
|
|
$
|
2.27
|
|
$
|
2.23
|
|
$
|
1.80
|
|
Diluted -
Income from continuing operations
|
|
$
|
3.73
|
|
$
|
2.73
|
|
$
|
2.12
|
|
$
|
2.17
|
|
$
|
1.86
|
|
-
Income (loss) from discontinued operations
|
|
|
|
|
|
0.18
|
|
|
0.13
|
|
|
0.04
|
|
|
(0.07
|
)
|
-
Net income
|
|
$
|
3.72
(e
|
)
|
$
|
2.91
|
|
$
|
2.25
|
|
$
|
2.21
|
|
$
|
1.79
|
|
Book
value
|
|
$
|
23.79
|
|
$
|
22.07
|
|
$
|
19.01
|
|
$
|
15.90
|
|
$
|
17.16
|
|
Cash
dividends declared
|
|
|
1.225
|
|
|
1.125
|
|
|
1.0625
|
|
|
1.0125
|
|
|
0.97
|
|
Other
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
average number of shares outstanding
|
|
|
42,080
|
|
|
41,598
|
|
|
40,973
|
|
|
40,680
|
|
|
40,066
|
|
Number
of employees
|
|
|
21,000
|
|
|
18,500
|
|
|
17,500
|
|
|
17,500
|
|
|
18,700
|
|
Backlog
from continuing operations (f)
|
|
$
|
275,790
|
|
$
|
243,006
|
|
$
|
186,222
|
|
$
|
157,777
|
|
$
|
214,124
|
|
(a) |
Includes
the Northern Hemisphere mill services operations of Brambles Industrial
Services (BISNH) acquired December 29, 2005 (Mill Services) and Hünnebeck
Group GmbH acquired November 21, 2005 (Access
Services).
|
(b) |
“Return
on
sales”
is calculated by dividing income from continuing operations by revenues
from continuing operations.
|
(c) |
“Return
on average equity” is calculated by dividing income from continuing
operations by quarterly weighted-average
equity.
|
(d) |
“Total
debt to total capital” is calculated by dividing the sum of debt
(short-term borrowings and long-term debt including current maturities)
by
the sum of equity and debt.
|
(e) |
Does
not total due to rounding.
|
(f) |
Excludes
the estimated amount of long-term mill service contracts, which had
estimated future revenues of $4.3 billion at December 31, 2005. Also
excludes backlog of the Access Services Segment and the roofing granules
and slag abrasives business. These amounts are generally not quantifiable
due to the nature and timing of the products and services
provided.
|
Item
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of
1995. These statements involve a
number
of
risks, uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.
Forward-Looking
Statements
The
nature of the Company’s business
and the
many countries in which it operates subject it to changing economic,
competitive, regulatory and technological conditions, risks and uncertainties.
In accordance with the “safe harbor”
provisions of the
Private Securities Litigation Reform Act of 1995, the Company provides the
following cautionary remarks regarding important factors which, among others,
could cause future results to differ materially from the forward-looking
statements, expectations and assumptions expressed or implied herein.
Forward-looking statements contained herein could include statements about
our
management confidence and strategies for performance; expectations for new
and
existing products, technologies, and opportunities; and expectations regarding
growth, sales, cash flows, earnings and Economic Value Added (EVA®). These
statements can be identified by the use of such terms as “may,” “could,”
“expect,” “anticipate,” “intend,” “believe,” or other comparable
terms.
Factors
which could cause results to differ include, but are not limited to: (1) changes
in the worldwide business environment in which the Company operates, including
general economic conditions; (2) changes in currency exchange rates, interest
rates and capital costs; (3) changes in the performance of stock and bond
markets that could affect the valuation of the assets in the Company’s pension
plans and the accounting for pension assets, liabilities and expenses; (4)
changes in governmental laws and regulations, including taxes and import
tariffs; (5) market and competitive changes, including pricing pressures, market
demand and acceptance for new products, services and technologies; (6)
unforeseen business disruptions in one or more of the many countries in which
the Company operates due to political instability, civil disobedience, armed
hostilities or other calamities; and (7) other risk factors listed from time
to
time in the Company's SEC reports. A further discussion of these, along with
other potential factors can be found in Part I, Item 1A, “Risk Factors,” of this
Form 10-K. The Company cautions that these factors may not be exhaustive and
that many of these factors are beyond the Company’s ability to control or
predict. Accordingly, forward-looking statements should not be relied upon
as a
prediction of actual results. The Company undertakes no duty to update
forward-looking statements.
Executive
Overview
The
Company’s 2005 revenues were a record $2.8 billion. This is an increase of $0.3
billion or 11% over 2004. Income from continuing operations was a record $156.8
million for 2005 compared with $113.5 million in 2004, an increase of 38%.
Diluted earnings per share from continuing operations were a record $3.73 for
2005, a 37% increase from 2004.
All
four
of the Company’s operating groups showed improved full-year results over the
prior year. The 2005 results were led by the Access Services Segment and the
Engineered Products and Services (“all other”) Category as a result of strong
end-markets, margin improvements and share gains. The Mill Services Segment
delivered increased sales and operating income despite essentially flat global
steel production (excluding China), higher fuel costs and the timing of new
contract signings. The Gas Technologies Segment experienced some moderating
raw
material cost inflation, in several product lines, that benefited operating
income compared with 2004. Additionally, in the fourth quarter of 2005, the
Company completed two strategic bolt-on acquisitions, one in the Access Services
Segment on November 21 (Hünnebeck Group GmbH), and one in the Mill Services
Segment on December 29 (the Northern Hemisphere mill services operations of
Brambles Industrial Services (“BISNH”)).
During
2005, the Company had record net cash provided by operating activities of $315.3
million, a 17% increase over the $270.5 million achieved in 2004. For 2006,
the
Company has set a target of $400 million for net cash provided by operating
activities, a 27% increase over the 2005 record level. The Company’s cash flows
are further discussed in the Liquidity and Capital Resources
section.
The
record revenue, income from continuing operations and diluted earnings per
share
from continuing operations for 2005 demonstrate the balance and geographic
diversity of the Company’s operations. The Company’s Mill Services, Access
Services and Gas Technologies Segments, as well as the Engineered Products
and
Services (“all other”) Category all delivered improved results. This operating
balance and geographic diversity provides a broad foundation for future growth
opportunities and a hedge against normal changes in economic and industrial
cycles.
Segment
Overview
Revenues
for 2005 for the Mill Services Segment were $1.1 billion compared with $1.0
billion in 2004, a 6% increase. Operating income increased by 4% to $109.6
million, from $105.5 million in 2004. Operating margins for this Segment
decreased by 30 basis points to 10.3% from 10.6% in 2004 due to higher energy
costs and production cutbacks in the last half of 2005 by certain steel mill
customers. A benefit from the gain on the sale of certain assets related to
exiting an underperforming contract was mostly offset by the impact of higher
severance costs. This Segment accounted for 38% of the Company’s revenues and
41% of the operating income for 2005.
The
Access Services Segment’s revenues in 2005 were $788.8 million compared with
$706.5 million in 2004, a 12% increase. Operating income increased by 68% to
$74.7 million, from $44.5 million in 2004. Operating margins for the Segment
improved by 320 basis points to 9.5% from 6.3% in 2004. These improvements
were
due to increased rental equipment utilization; better non-residential
construction market conditions; market share gains; improved pricing,
particularly in the United States; and $5.4 million of pre-tax gains from the
disposal of assets related to the closing of a branch location and the sale
of
the Youngman light-access manufacturing business. This Segment accounted for
29%
of the Company’s revenues and 28% of the operating income for 2005. Improved
performance was achieved by both the international and domestic Access Services
operations.
The
Gas
Technologies Segment’s revenues in 2005 were $370.2 million compared with $339.1
million in 2004, a 9% increase. Operating income increased by 24% to $17.9
million, from $14.4 million in 2004. The increased revenues in 2005 were led
by
the industrial cylinder and cryogenics equipment businesses. As expected,
operating income and margins were positively affected in 2005 by moderating
commodity cost increases, particularly steel, compared with 2004. This Segment
accounted for 13% of the Company’s revenues and 7% of the operating income for
2005.
Four
of
the five businesses in the Engineered Products and Services (“all other”)
Category contributed higher revenues, operating income and operating margins
in
2005 compared with 2004. The railway track maintenance services and equipment
business delivered record revenues in 2005 through increased contracting
services activity and strong equipment and repair parts sales. The air-cooled
heat exchangers business also experienced improved market conditions that have
resulted in increased volumes and backlogs. The industrial grating products
business had improved revenues and operating income due to increased demand
(partially due to the effects of Hurricanes Katrina and Rita) and, to a lesser
extent, higher prices and an improved product mix. The roofing granules and
abrasives business and the boiler and process equipment business delivered
solid
performances in 2005, consistent with the prior year.
The
positive effect of foreign currency translation increased 2005 consolidated
revenues by $14.8 million and pre-tax income by $3.1 million when compared
with
2004.
Outlook
Overview
The
Company’s operations span several industries and products as more fully
discussed in Part I, Item 1, “Business.” On a macro basis, the Company is
affected by worldwide steel mill production and capacity utilization;
non-residential construction and industrial maintenance activities; industrial
production volume; and the general business trend towards the outsourcing of
services. The overall outlook for 2006 continues to be positive for these
business drivers.
The
Company’s Mill Services Segment expects to benefit from gradually increasing
steel production at mills served by the Company, new contract signings and
a
full year of accretion from the December 29, 2005 acquisition of BISNH. However,
the Company also expects to experience continued increased energy costs that
may
have a negative effect on operating margins, to the extent these costs cannot
be
passed to customers.
Both
domestic and international Access Services activity remains strong. Although
the
sale of the Youngman light-access manufacturing business in late 2005 will
modestly affect 2006 revenues, improvements to operating performance in 2006
for
the Segment are expected to be led by a full-year of accretion from the November
21, 2005 Hünnebeck acquisition; increased non-residential construction spending
and industrial maintenance activity in the Company’s major markets; continued
development of new markets; further market penetration from new products;
product cross-selling opportunities among the markets served by the three Access
Services businesses; and cost reduction opportunities through consolidated
procurement initiatives.
In
the
Gas Technologies Segment for 2006, demand for industrial cylinders and
cryogenics equipment is expected to show continued improvement. The propane
business is expected to return to a more normal business cycle in comparison
to
the prior two years, and an overall improvement in the valves business is
expected. International operations are expected to continue to perform well.
However, the risk remains that certain commodity cost inflation and the
availability of certain raw materials could adversely affect this Segment’s
results.
The
outlook for the Engineered Products and Services (“all other”) Category remains
positive for 2006. The Company’s railway track maintenance services and
equipment business’ income and margins are expected to continue to benefit from
the shift toward contract services, with several major contracts scheduled
to
start in 2006. The air-cooled heat exchangers business is expected to continue
to benefit from strong end-market demand due to increased natural gas drilling
and transmission. While not expecting a repeat of the same level of benefits
from post-Katrina rebuilding experienced in the second half of 2005, the
industrial grating products business is expected to post another year of solid,
stable results in 2006, as are the roofing granules and abrasives and the boiler
and process equipment businesses.
The
stable or improved market conditions for most of the Company’s services and
products and the significant investments made for acquisitions and
growth-related capital expenditures provide a solid base for achieving the
Company’s stated objective of growth in diluted earnings per share from
continuing operations in 2006.
|
|
Revenues
by Region
|
|
|
|
Total
Revenues
Twelve
Months Ended December 31
|
|
Percentage
Growth From
2004
to 2005
|
|
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
Volume
|
|
Currency
|
|
Total
|
|
North
America
|
|
$
|
1,219.8
|
|
$
|
1,103.7
|
|
|
10.2
|
%
|
|
0.3
|
%
|
|
10.5
|
%
|
Europe
|
|
|
1,109.1
|
|
|
1,018.1
|
|
|
9.6
|
|
|
(0.7
|
)
|
|
8.9
|
|
Middle
East and Africa
|
|
|
153.7
|
|
|
137.7
|
|
|
10.9
|
|
|
0.7
|
|
|
11.6
|
|
Latin
America
|
|
|
149.2
|
|
|
122.9
|
|
|
9.9
|
|
|
11.5
|
|
|
21.4
|
|
Asia/Pacific
|
|
|
134.4
|
|
|
119.7
|
|
|
9.8
|
|
|
2.5
|
|
|
12.3
|
|
Total
|
|
$
|
2,766.2
|
|
$
|
2,502.1
|
|
|
10.0
|
%
|
|
0.6
|
%
|
|
10.6
|
%
|
2005
Highlights
The
following significant items impacted the Company overall during 2005 in
comparison with 2004:
Company
Wide:
· |
Strong
worldwide economic activity benefited the Company in 2005. This included
increased access equipment sales and rentals, especially in the U.S.,
Middle East and Europe; increased global demand for railway track
maintenance services and equipment; and increased demand for air-cooled
heat exchangers, industrial cylinders, cryogenics equipment and industrial
grating products. During the first half of 2005, the Company’s Mill
Services Segment benefited from strong steel production activity;
however,
during the second half of 2005, steel production at certain mills
served
by this Segment declined, negatively impacting
results.
|
· |
As
expected, during 2005, the Company experienced an overall leveling-off
of
commodity cost increases (particularly steel); however, fuel and
energy-related costs and certain other commodity costs continued
to
increase. To the extent that such costs cannot be passed to customers
in
the future, operating income may be adversely affected. The Company
uses
the last-in, first-out (LIFO) method of inventory accounting for
most of
its manufacturing businesses. LIFO matches the most recently incurred
costs with current revenues by charging cost of goods sold with the
costs
of goods most recently acquired or produced. In periods of rising
prices,
reported costs under LIFO are generally greater than under the first-in,
first-out (FIFO) method. Based on current economic forecasts, cost
inflation for certain commodities used by the Company is expected
to
increase slightly in 2006, although fuel and energy-related costs
are
expected to continue to increase at a higher rate. However, there
can be
no assurance that will occur.
|
· |
Total
pension expense for 2005 decreased $1.7 million from 2004. Defined
benefit
pension expense for 2005 decreased approximately $3.8 million from
2004
due to plan structural changes implemented in recent years. During
2005,
the defined benefit pension expense decrease was partially offset
by
increases of approximately $1.5 million and $0.7 million in defined
contribution plan and multi-employer plan expenses, respectively.
The
Company is currently taking additional actions to further reduce
pension
expense volatility. This is more fully discussed in the Outlook,
Trends
and Strategies section.
|
· |
Net
Other expenses for 2005 included $9.7 million in net gains on the
sale of
non-core assets, mostly offset by $9.1 million in employee termination
benefit costs. This compares with $1.5 million in net gains on the
sale of
assets and $3.9 million in employee termination benefit costs in
2004.
|
· |
During
2005, international sales and income were 58% and 67%, respectively,
of
total sales and income. This compares with the 2004 levels of 58%
of sales
and 69% of income. The international percentages are expected to
increase
in 2006 as a result of the late-2005 Hünnebeck and BISNH
acquisitions.
|
Mill
Services Segment:
|
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
|
Revenues
|
|
$
|
1,060.4
|
|
$
|
997.4
|
|
|
Operating
income
|
|
|
109.6
|
|
|
105.5
|
|
|
Operating
margin percent
|
|
|
10.3
|
%
|
|
10.6
|
%
|
|
|
|
|
|
|
Mill
Services Segment - Significant Impacts on Revenues:
|
|
(In
millions)
|
|
|
Revenues
- 2004
|
|
$
|
997.4
|
|
|
Increased
volume and new business
|
|
|
42.0
|
|
|
Benefit
of positive foreign currency translation
|
|
|
17.0
|
|
|
Acquisition
- (principally Evulca SAS in France) (a)
|
|
|
4.0
|
|
|
Revenues
- 2005
|
|
$
|
1,060.4
|
|
(a) |
Since
BISNH was acquired on December 29, 2005, it did not have a significant
effect on 2005 operations.
|
Mill
Services Segment - Significant Impacts on Operating
Income:
· |
Operating
income for 2005 increased slightly as a result of increased pricing
for
certain contracts and new business, particularly in Europe and Brazil,
mostly offset by increased operating costs (as noted below) and reduced
volume in South Africa and North America during the majority of 2005.
|
· |
Compared
with 2004, the Segment’s operating income and margins in 2005 were
negatively impacted by increased fuel and energy-related costs of
approximately $13 million.
|
· |
Selling,
general and administrative costs increased $5.4 million for 2005
(including approximately $1.1 million related to foreign currency
translation). These increases related primarily to increased compensation
costs.
|
· |
The
benefit of positive foreign currency translation in 2005 resulted
in
increased operating income of $2.1 million compared with 2004.
|
Access
Services Segment:
|
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
|
Revenues
|
|
$
|
788.8
|
|
$
|
706.5
|
|
|
Operating
income
|
|
|
74.7
|
|
|
44.4
|
|
|
Operating
margin percent
|
|
|
9.5
|
%
|
|
6.3
|
%
|
|
|
|
|
|
|
Access
Services Segment - Significant Impacts on Revenues:
|
|
(In
millions)
|
|
|
Revenues
- 2004
|
|
$
|
706.5
|
|
|
Net
increased volume (mostly U.S., Middle East and Continental
Europe)
|
|
|
72.0
|
|
|
Net
effect of acquisitions and divestitures (Hünnebeck and SGB Raffia in
Australia
(acquired in April 2004)) offset by the Youngman light-access
manufacturing
unit divestiture)
|
|
|
12.5
|
|
|
Impact
of negative foreign currency translation
|
|
|
(2.8
|
)
|
|
Other
|
|
|
0.6
|
|
|
Revenues
- 2005
|
|
$
|
788.8
|
|
Access
Services Segment - Significant Impacts on Operating
Income:
· |
In
2005, there was a continued strengthening in the U.S. non-residential
construction markets that started in the latter half of 2004. During
2005,
the value of rental equipment on customer job sites was at an all-time
high. This had a positive effect on volume (particularly equipment
rentals) which caused overall margins in the U.S. to improve. Equipment
rentals, particularly in the construction sector, provide the highest
margins for this Segment.
|
·
|
The
international access services business continued to increase outside
the
U.K., predominantly in the Middle East and Europe, due to certain
on-going
large projects as well as the Hünnebeck acquisition. During 2005, the
international operations outside of the U.K. had $305.3 million in
revenues and $45.5 million in operating income. This compares with
$231.5
million in revenues and $29.9 million in operating income for
2004.
|
·
|
During
2005, the Segment was favorably affected by pre-tax income of $5.4
million
from the disposal of assets related to the closing of a branch location
and the sale of the Youngman light-access manufacturing unit. During
2004,
only $1.1 million of similar benefits
occurred.
|
·
|
Lower
pension expense in 2005 increased operating income by approximately
$5.0
million when compared with 2004.
|
·
|
The
net effect of acquisitions and divestitures had a positive effect
on 2005
operating income and margins, with the Hünnebeck business contributing
income during it first full month of
operation.
|
·
|
The
benefit of positive foreign currency translation in 2005 for this
Segment
resulted in increased operating income of $0.9 million when compared
with
2004.
|
Gas
Technologies Segment:
|
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
|
Revenues
|
|
$
|
370.2
|
|
$
|
339.1
|
|
|
Operating
income
|
|
|
17.9
|
|
|
14.4
|
|
|
Operating
margin percent
|
|
|
4.8
|
%
|
|
4.2
|
%
|
|
Gas
Technologies Segment - Significant Impacts on
Revenues:
|
|
(In
millions)
|
|
|
Revenues
- 2004
|
|
$
|
339.1
|
|
|
Increased
demand for cryogenics equipment and industrial cylinders
|
|
|
25.3
|
|
|
Increased
demand for composite-wrapped cylinders and certain valves
|
|
|
8.1
|
|
|
Decreased
sales of propane tanks (due to customers accelerating purchases in
2004 to
avoid price increases)
|
|
|
(2.0
|
)
|
|
Other
|
|
|
(0.3
|
)
|
|
Revenues
- 2005
|
|
$
|
370.2
|
|
Gas
Technologies Segment - Significant Impacts on Operating
Income:
·
|
Operating
income increased in 2005 compared with 2004 due mainly to moderating
commodity cost increases, particularly steel. Since this Segment
accounts
for the majority of its U.S. inventory using the last-in, first-out
(LIFO)
method, this moderation of commodity costs has resulted in improved
operating income.
|
·
|
The
international businesses, in Europe and, to a lesser extent, Asia,
contributed significantly to the increased performance of the cryogenics
business during 2005 compared with
2004.
|
·
|
Higher
operating income in 2005 for composite-wrapped cylinders was due
to
increased shipments of natural gas vehicle (NGV) cylinders, partially
offset by an unfavorable product mix and higher raw material costs
for
carbon fiber and aluminum.
|
·
|
Higher
operating income for industrial cylinders was due to increased demand
and
selling price increases, partially offset by higher energy-related
and
steel costs.
|
·
|
Increased
costs and an unfavorable product mix in the valves business negatively
impacted operating income in 2005 compared with 2004. A strategic
action
plan has been implemented to improve the results of the valves business.
This plan is further discussed in the Outlook, Trends and Strategies
section.
|
·
|
As
expected, the propane business had decreased revenues and operating
income
in 2005 when compared with 2004. As indicated last year, there was
increased demand for propane tanks in 2004 driven by customers
accelerating purchases in anticipation of future price increases
due to
higher steel prices.
|
·
|
Foreign
currency translation in 2005 did not have a material impact on operating
income for this Segment compared with 2004.
|
Engineered
Products and Services (“all other”) Category:
|
(Dollars
in millions)
|
|
2005
|
|
2004
|
|
|
Revenues
|
|
$
|
546.9
|
|
$
|
459.1
|
|
|
Operating
income
|
|
|
69.7
|
|
|
47.0
|
|
|
Operating
margin percent
|
|
|
12.7
|
%
|
|
10.2
|
%
|
|
Engineered
Products and Services (“all other”) Category -
Significant
Impacts on Revenues:
|
|
(In
millions)
|
|
|
Revenues
- 2004
|
|
$
|
459.1
|
|
|
Railway
track services and equipment
|
|
|
38.0
|
|
|
Air-cooled
heat exchangers
|
|
|
32.2
|
|
|
Industrial
grating products
|
|
|
12.4
|
|
|
Boiler
and process equipment
|
|
|
3.3
|
|
|
Roofing
granules and abrasives
|
|
|
1.4
|
|
|
Benefit
of positive foreign currency translation
|
|
|
0.5
|
|
|
Revenues
- 2005
|
|
$
|
546.9
|
|
Engineered
Products and Services (“all other”) Category - Significant Impacts on Operating
Income:
·
|
Higher
operating income in 2005 (including a record third quarter) in comparison
to 2004 for the railway track maintenance services and equipment
business
was due principally to increased rail equipment sales (principally
to
international customers), international contract services and repair
parts
sales. This was partially offset by increased engineering costs;
selling,
general and administrative expenses; and Other expenses related to
employee termination benefit costs.
|
·
|
Operating
income for the air-cooled heat exchangers business improved in 2005
due to
increased volume resulting from an improved natural gas
market.
|
·
|
Increased
2005 operating income for the industrial grating products business
was due
principally to reduced commodity costs; increased demand (partially
due to
the effects of Hurricanes Katrina and Rita); and, to a lesser extent,
increased prices and an improved product mix.
|
·
|
The
boiler and process equipment business delivered improved 2005 results
due
to improved revenues from the new-generation Mach
boilers.
|
·
|
Strong
demand for roofing granules and abrasives again resulted in sustained
levels of profitable results for that business in 2005, consistent
with
prior periods. This is despite difficulty throughout the third and
fourth
quarters of 2005 in obtaining rail cars to deliver its products,
and, to a
lesser extent, higher energy costs.
|
·
|
The
impact of positive foreign currency translation in 2005 resulted
in
decreased operating income of $0.2 million for this Category when
compared
with 2004.
|
Outlook,
Trends and Strategies
Looking
to 2006 and beyond, the following significant items, trends and strategies
are
expected to affect the Company in comparison with 2005:
Company
Wide:
· |
The
Company will continue its focus on expanding the higher-margin industrial
services businesses, with a particular emphasis on growing the Mill
Services Segment, Access Services Segment and railway services through
the
provision of additional services to existing customers, new contracts
in
both mature and emerging markets and strategic acquisitions such
as the
2005 Hünnebeck and BISNH acquisitions in the Access Services and Mill
Services Segments, respectively.
|
· |
A
greater focus on corporate-wide expansion into China is expected
in 2006
and beyond. The opening of a representative office in Beijing in
the
fourth quarter of 2005 has provided a local presence to pursue new
business opportunities for all operating units of the
Company.
|
· |
The
continued growth of the Chinese steel industry could impact the Company
in
several ways. Increased steel mill production in China may provide
additional service opportunities for the Mill Services Segment. However,
increased Chinese steel exports could result in lower steel production
in
other parts of the world affecting the Company’s
|
|
customer
base. Additionally, although certain commodity cost increases (e.g.,
steel) have stabilized in 2005, continued increased Chinese economic
activity may result in increased commodity costs in the future, which
may
adversely affect the Company’s manufacturing businesses. The potential
impact of these risks is currently
unknown.
|
· |
Fuel
and energy costs increased approximately $18 million in 2005 compared
with
2004. Should these costs continue to rise, the Company’s operating costs
would further increase and profitability would decline to the extent
that
such costs cannot be passed to customers.
|
· |
Foreign
currency translation had an overall favorable effect on the Company’s
sales and income during 2005 (although during the fourth quarter
it was
negative), but a negative impact on Stockholders’ equity as a result of
translation adjustments. Should the U.S. dollar continue to strengthen,
particularly in relationship to the euro or British pound sterling,
the
impact on the Company would generally be negative in terms of reduced
sales, income and Stockholders’
equity.
|
· |
The
Company will continue to focus on improving Economic Value Added
(EVA®).
Under this program, the Company evaluates strategic investments based
upon
the investment’s economic profit. EVA equals after-tax operating profits
less a charge for the use of the capital employed to create those
profits
(only the service cost portion of defined benefit pension expense
is
included for EVA purposes). Therefore, value is created when a project
or
initiative produces a return above the cost of capital.
|
· |
A
record $400 million in net cash provided by operating activities
has been
targeted for 2006.
|
· |
Controllable
cost reductions and continuous process improvement initiatives across
the
Company are targeted to further enhance margins for most businesses.
These
initiatives include improved supply chain management; additional
outsourcing in the manufacturing businesses; and an added emphasis
on
corporate-wide procurement initiatives. The Company will use its
increased
size and leverage due to recent acquisitions to reduce vendor costs
and
focus on additional opportunities for cost reductions via procurement
in
low-cost countries such as China.
|
· |
Total
pension expense (defined benefit, defined contribution and multi-employer)
for 2006 is expected to approximate the 2005 level, or be slightly
lower.
In the U.K., pension expense is expected to decline in 2006 due to
the
significant level (approximately $20 million in the past 18 months)
of
voluntary cash contributions to the defined benefit pension plan
and the
improved 2005 performance of the plan’s assets. Domestically, the majority
of the twenty-year amortization of the transition asset (from the
initial
implementation of SFAS No. 87 in 1986) will cease during 2006. The
elimination of this benefit is projected to increase domestic
defined-benefit pension expense by approximately $1.0 million when
compared with 2005. The Company’s pension committee continues to evaluate
alternative strategies to further mitigate overall pension expense
including the on-going evaluation of investment fund managers’
performance; the balancing of plan assets and liabilities; the risk
assessment of all multi-employer pension plans; the possible merger
of
certain plans; the consideration of incremental cash contributions
to
certain plans; and other changes that will mitigate future volatility
and
expense.
|
· |
Changes
in worldwide interest rates could have a greater effect on the Company’s
overall interest expense as currently approximately 50% of the Company’s
borrowings are at variable interest rates (in comparison to approximately
12% at December 31, 2004). The Company is considering refinancing
certain
variable interest-rate borrowings at longer-term fixed rates to reduce
potential volatility. However, this may increase short-term interest
expense as currently, longer-term fixed interest rates are higher
than
variable shorter-term interest
rates.
|
· |
On
October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was
signed into law. The AJCA includes a deduction of 85% for certain
international earnings that are repatriated, as defined in the AJCA,
to
the U.S. The Company completed its evaluation of the repatriation
provisions of the AJCA and repatriated qualified earnings of approximately
$24 million in the fourth quarter of 2005. This resulted in the
Company receiving a one-time income tax benefit of approximately
$2.7
million during the fourth quarter of 2005. In 2006, the effective
income tax rate for continuing operations is expected to approximate
33%.
This compares with an effective income tax rate of 28.1% in 2005.
The difference is primarily due to the one-time tax benefit from
the AJCA
as indicated above and, consistent with the Company’s strategic plan of
investing for growth, the Company designated certain international
earnings as permanently reinvested which resulted in a one-time income
tax
benefit of $3.6 million.
|
Mill
Services Segment:
· |
To
maintain pricing levels, a more disciplined steel industry has been
adjusting production levels to bring inventories in-line with current
demand. Based on current market conditions and industry reports, the
Company expects global steel production to increase in 2006.
|
· |
The
increased energy-related costs this Segment experienced during 2005
are
expected to persist through 2006. However, given the volatility of
such
costs, the effect cannot be
quantified.
|
· |
The
Company will be placing significant emphasis on improving operating
margins of this Segment. Specific plans for 2006 include global
procurement initiatives, process improvement programs, maintenance
best
practices programs and executing its reorganization
plan.
|
· |
The
BISNH acquisition will provide increased sales and income for this
Segment.
|
· |
Further
consolidation in the global steel industry is also possible. Should
transactions occur involving some of the steel industry’s larger companies
that are customers of the Company, it would result in an increase
in
concentration of
|
|
credit
risk for the Company. If a large customer were to experience financial
difficulty, or file for bankruptcy protection, it could adversely
impact
the Company’s income, cash flows and asset valuations. As part of its
credit risk management practices, the Company is developing strategies
to
mitigate this increased concentration of credit
risk.
|
Access
Services Segment:
· |
Both
the international and domestic Access Services businesses are expected
to
show continued improvement during 2006.
|
· |
In
2005, the Youngman light-access manufacturing unit was sold and certain
large customer projects in the U.K. and Middle East are close to
completion, which will eliminate the associated revenue. In 2006,
these
decreases are expected to be offset by increased sales and income
from the
Hünnebeck acquisition and through the further development of core
activities. Additionally, the sale of the Youngman unit will allow
for
greater focus on the more profitable rental
business.
|
· |
U.S.
non-residential construction activity continued to improve in 2005
and the
overall market outlook remains positive. Various industry sources
are
currently forecasting continued growth for U.S. non-residential
construction during 2006. Additionally, new product line additions
should
assist with growth in North
America.
|
Gas
Technologies Segment:
· |
Although
cost inflation for steel and certain commodities moderated in 2005,
worldwide supply and demand for steel, aluminum and the availability
of
carbon fiber used to manufacture filament-wound composite cylinders
could
have adverse effects on future raw material costs and this Segment’s
ability to obtain the necessary raw materials. Additionally, the
price of
brass, a raw material used for certain valves production, continued
to
increase during 2005, despite expectations that it would moderate.
Should
brass prices continue to increase in 2006, this could result in reduced
operating income for certain products to the extent that such costs
cannot
be passed along to customers.
|
· |
Weak
market conditions and increased costs impacted the valves business
during
2005. A comprehensive strategic plan was developed and is currently
being executed to mitigate these conditions. The plan includes the
following: a new senior management team; development and marketing
of new
products; focus on an expanded international customer base; consolidating
certain manufacturing process; process improvements within the
manufacturing operations including outsourcing; and optimization
of the
organizational structure of the business. If the conditions encountered
during 2005 persist, despite execution of the strategic action plan,
the
valuation of this business could be negatively impacted.
|
· |
Despite
a decline in 2005, the propane business is expected to improve in
2006, as
it returns to its more normal business
cycle.
|
· |
The
industrial cylinder and cryogenics equipment businesses are expected
to
show continued improved performance in
2006.
|
Engineered
Products and Services (“all other”) Category:
· |
International
demand for the railway track maintenance services and equipment business’
products and services has been strong and is expected to remain so
in
2006. However, on a comparative basis, 2006 sales are expected to
be less
than 2005 due to the shipment of several large machine orders in
2005.
Despite this expected decrease in sales, operating income is expected
to
increase due to increased volume of higher-margin industrial services
and
manufacturing process improvements and efficiencies that are expected
to
improve margins on a long-term basis. Additionally, higher-margin
international equipment sales will continue to be pursued by this
business.
|
· |
The
industrial grating business is expected to sustain its current levels
of
sales and operating income for 2006. It is expected that the incremental
business received in 2005, as a result of recent hurricanes, will
be
replaced with new market
opportunities.
|
· |
Although
cost inflation for steel and certain commodities started to moderate
in
2005, worldwide supply and demand for steel could have an adverse
effect
on raw material costs and the ability to obtain the necessary raw
materials for most businesses in this Category.
|
· |
Consistent,
sustained profitable results are expected from the roofing granules
and
abrasives business, although increased energy costs could impact
margins.
This business is pursuing the use of more energy-efficient equipment
to
help mitigate the increased energy-related
costs.
|
· |
Due
to an improving natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected
to remain
strong for 2006.
|
Results
of Operations for 2005, 2004 and 2003
|
(Dollars
are in millions, except per share information and
percentages)
|
|
2005
|
|
2004
|
|
2003
|
|
|
Revenues
from continuing operations
|
|
$
|
2,766.2
|
|
$
|
2,502.1
|
|
$
|
2,118.5
|
|
|
Cost
of services and products sold
|
|
|
2,099.4
|
|
|
1,916.4
|
|
|
1,604.4
|
|
|
Selling,
general and administrative expenses
|
|
|
393.2
|
|
|
368.4
|
|
|
330.0
|
|
|
Other
expenses
|
|
|
2.0
|
|
|
4.9
|
|
|
7.0
|
|
|
Operating
income from continuing operations
|
|
|
268.9
|
|
|
209.8
|
|
|
173.9
|
|
|
Interest
expense
|
|
|
41.9
|
|
|
41.1
|
|
|
40.5
|
|
|
Income
tax expense from continuing operations
|
|
|
64.8
|
|
|
49.0
|
|
|
41.7
|
|
|
Income
from continuing operations
|
|
|
156.8
|
|
|
113.5
|
|
|
87.0
|
|
|
Income/(loss)
from discontinued operations
|
|
|
(0.1
|
)
|
|
7.7
|
|
|
5.2
|
|
|
Net
income
|
|
|
156.7
|
|
|
121.2
|
|
|
92.2
|
|
|
Diluted
earnings per common (continuing operations)
|
|
|
3.73
|
|
|
2.73
|
|
|
2.12
|
|
|
Diluted
earnings per common share
|
|
|
3.72
|
|
|
2.91
|
|
|
2.25
|
|
|
Effective
income tax rate for continuing operations
|
|
|
28.1
|
%
|
|
28.6
|
%
|
|
30.7
|
%
|
|
Consolidated
effective income tax rate
|
|
|
28.1
|
%
|
|
29.1
|
%
|
|
31.0
|
%
|
Comparative
Analysis of Consolidated Results
Revenues
2005
vs. 2004
Revenues
for 2005 increased $264.1 million or 11% from 2004, to a record level. This
increase was attributable to the following significant items:
|
In
millions
|
Change
in Revenues 2005 vs. 2004
|
|
$
72.5
|
Net
increased revenues in the Access Services Segment due principally
to
improved markets in the North America and the strength of the
international business, particularly in the Middle East and Europe
(excluding the net effect of acquisitions and
divestitures).
|
|
41.9
|
Net
increased volume, new contracts and price changes in the Mill Services
Segment (excluding acquisitions).
|
|
38.0
|
Net
increased revenues in the railway track maintenance services and
equipment
business due to increased contract services (principally in the U.K.),
rail equipment sales (primarily to international customers) and repair
part sales.
|
|
32.2
|
Increased
revenues of the air-cooled heat exchangers business due to an improved
natural gas market.
|
|
31.0
|
Net
increased revenues in the Gas Technologies Segment due principally
to
improved market conditions for industrial cylinders, cryogenics equipment
and composite-wrapped cylinders, partially offset by slightly decreased
demand for propane tanks. The decrease in propane tank sales was
due to
customers accelerating purchases in 2004 to avoid anticipated price
increases due to commodity cost inflation.
|
|
16.5
|
Net
effect of business acquisitions and divestitures. Increased revenues
of
$4.0 and $12.5 million in the Mill Services and Access Services Segments,
respectively.
|
|
14.8
|
Effect
of foreign currency translation.
|
|
12.4
|
Increased
revenues of the industrial grating products business due to increased
demand (partially due to the effects of Hurricanes Katrina and Rita)
and,
to a lesser extent, increased prices and a more favorable product
mix.
|
|
4.8
|
Other
(minor changes across the various units not already
mentioned).
|
|
$
264.1
|
Total
Change in Revenues 2005 vs. 2004
|
2004
vs. 2003
Revenues
for 2004 increased $383.5 million or 18% from 2003, to a record level at that
time. This increase was attributable to the following significant
items:
|
In
millions
|
Change
in Revenues 2004 vs. 2003
|
|
$ 108.9
|
Effect
of foreign currency translation.
|
|
83.1
|
Net
increased volume, new contracts and price changes in the Mill Services
Segment.
|
|
43.5
|
Net
increased revenues in the Gas Technologies Segment due principally
to
improved market conditions and selling price increases, partially
offset
by decreased demand for liquid propane gas (LPG) valves in the patio
grill
market and for composite-wrapped cylinders.
|
|
36.1
|
Effect
of business acquisitions. Increased revenues of $27.5 and $8.6 million
in
the Mill Services and Access Services Segments,
respectively.
|
|
33.6
|
Net
increased revenues in the railway track maintenance services and
equipment
business due principally to rail equipment sales and, to a lesser
extent,
contract services.
|
|
33.4
|
Net
increased revenues in the Access Services Segment due principally
to the
strength of the concrete forming business, particularly in the Middle
East
and U.K.
|
|
20.1
|
Increased
revenues of the industrial grating products business due to increased
demand and a focus on higher-margin standard product
orders.
|
|
18.9
|
Increased
revenues of the air-cooled heat exchangers business due to improved
natural gas markets.
|
|
5.9
|
Other
(minor changes across the various units not already
mentioned).
|
|
$
383.5
|
Total
Change in Revenues 2004 vs. 2003
|
Cost
of Services and Products Sold
2005
vs. 2004
Cost
of
services and products sold for 2005 increased $183.0 million or 10% from 2004,
slightly lower than the 11% increase in revenues. This increase was attributable
to the following significant items:
|
In
millions
|
Change
in Cost of Services and Products Sold 2005 vs.
2004
|
|
$
177.8
|
Increased
costs due to increased revenues (exclusive of the effect of foreign
currency translation and business acquisitions and including the
impact of
increased costs included in selling prices).
|
|
12.7
|
Effect
of foreign currency translation.
|
|
4.1
|
Net
effect of business acquisitions and divestitures.
|
|
(11.6)
|
Other
(due to product mix; stringent cost controls; process improvements;
and
minor changes across the various units not already mentioned; partially
offset by increased fuel and energy-related costs).
|
|
$
183.0
|
Total
Change in Cost of Services and Products Sold 2005 vs.
2004
|
2004
vs. 2003
Cost
of
services and products sold for 2004 increased $312.0 million or 19% from 2003,
slightly higher than the 18% increase in revenues. This increase was
attributable to the following significant items:
|
In
millions
|
Change
in Cost of Services and Products Sold 2004 vs.
2003
|
|
$
186.2
|
Increased
costs due to increased revenues (exclusive of effect of foreign currency
translation and including the impact of increased costs included
in
increased selling prices).
|
|
80.9
|
Effect
of foreign currency translation.
|
|
32.8
|
Effect
of business acquisitions.
|
|
12.1
|
Other
(due to increased commodity costs, increased fuel and energy-related
costs, product mix and minor changes across the various units not
already
mentioned; partially offset by stringent cost controls, process
improvements, and reorganization actions).
|
|
$
312.0
|
Total
Change in Cost of Services and Products Sold 2004 vs.
2003
|
Selling,
General and Administrative Expenses
2005
vs. 2004
Selling,
general and administrative expenses for 2005 increased $24.8 million or 7%
from
2004, less than the 11% increase in revenues. This increase was attributable
to
the following significant items:
|
In
millions
|
Change
in Selling, General and Administrative Expenses 2005 vs.
2004
|
|
$
6.5
|
Increased
employee compensation expense due to salary increases, increased
payroll
taxes and employee incentive plan increases due to improved performance,
partially offset by decreased defined benefit pension expense.
|
|
5.6
|
Net
effect of business acquisitions and dispositions.
|
|
3.5
|
Increased
sales commission expense due to increased revenues.
|
|
1.9
|
Increased
costs on a comparative basis due to income generated by the termination
of
postretirement benefit plans in 2004 that were not repeated in
2005.
|
|
1.4
|
Increased
travel expenses.
|
|
1.0
|
Increased
professional fees due to special projects.
|
|
0.4
|
Effect
of foreign currency translation.
|
|
4.5
|
Other
(including energy-related costs and the cost of new technology
projects).
|
|
$
24.8
|
Total
Change in Selling, General and Administrative Expenses 2005 vs.
2004
|
2004
vs. 2003
Selling,
general and administrative expenses for 2004 increased $38.4 million or 12%
from
2003, less than the 18% increase in revenues. This increase was attributable
to
the following significant items:
|
In
millions
|
Change
in Selling, General and Administrative Expenses 2004 vs.
2003
|
|
$
17.9
|
Effect
of foreign currency translation.
|
|
5.4
|
Increased
professional fees due to higher external auditor fees (related to
Sarbanes-Oxley Section 404) and increased consulting and legal
expense.
|
|
4.4
|
Increased
sales commission expense due to increased revenues.
|
|
4.2
|
Increased
pension expense in the Access Services Segment
|
|
1.7
|
Effect
of business acquisitions - principally SGB Raffia in
Australia
|
|
4.8
|
Other
(including energy-related costs partially offset by process improvements
and reorganization efforts).
|
|
$
38.4
|
Total
Change in Selling, General and Administrative Expenses 2004 vs.
2003
|
Other
Expenses
This
income statement classification includes impaired asset write-downs, employee
termination benefit costs and costs to exit activities, offset by net gains
on
the disposal of non-core assets. During 2005, the Company continued its strategy
to streamline operations. This strategy included the sale of certain assets
related to exiting an underperforming Mill Services contract; the sale of
certain assets and the Youngman light access manufacturing unit in the Access
Services Segment; and, where appropriate, headcount reductions in both
administrative and operating positions. These actions resulted in net Other
Expenses of $2.0 million in 2005 compared with $4.9 million in 2004 and $7.0
million in 2003.
2005
vs. 2004
Net
Other
Expenses for 2005 decreased $2.9 million or 59% from 2004. This decrease was
attributable to the following significant items:
|
In
millions
|
Change
in Other Expenses 2005 vs. 2004
|
|
$
(8.2)
|
Increase
in net gains on disposals of non-core assets. This increase was
attributable principally to $9.7 million in net gains that were realized
in 2005 from the sale of non-core assets principally within the Access
Services and Mill Services Segments compared with $1.5 million in
2004.
|
|
5.2
|
Increase
in employee termination benefit costs. This increase related principally
to increased costs in the Mill Services and Access Services Segments
as
well as the Engineered Products and Services (“all other”) Category and
the Corporate headquarters compared with 2004.
|
|
0.1
|
Increase
in other expenses.
|
|
$
(2.9)
|
Total
Change in Other Expenses 2005 vs.
2004
|
2004
vs. 2003
Other
Expenses for 2004 decreased $2.1 million or 30% from 2003. This decrease was
attributable to the following significant items:
|
In
millions
|
Change
in Other Expenses 2004 vs. 2003
|
|
$
(2.2)
|
Decline
in employee termination benefit costs. This decline related principally
to
reduced costs in the Mill Services and Access Services Segments compared
with 2003.
|
|
(1.7)
|
Decrease
in costs to exit activities.
|
|
2.0
|
Decline
in net gains on disposals of non-core assets. This decline was
attributable principally to $3.2 million in net gains that were realized
in 2003 from the sale of non-core assets within the Access Services
and
Mill Services Segments compared with $1.5 million in
2004.
|
|
(0.2)
|
Increase
in other expenses.
|
|
$
(2.1)
|
Total
Change in Other Expenses 2004 vs.
2003
|
For
additional information, see Note 15, Other (Income) and Expenses, to the
Consolidated Financial Statements under Part II, Item 8, “Financial Statements
and Supplementary Data.”
Interest
Expense
2005
vs. 2004
Interest
expense in 2005 was $0.9 million or 2% higher than in 2004. This was principally
due to higher interest rates on variable interest rate borrowings in the United
States and, to a lesser extent, increased borrowings in November and December
2005 to finance acquisitions. This was partially offset by approximately $0.3
million of decreased interest expense due to the effect of foreign currency
translation.
2004
vs. 2003
Interest
expense in 2004 was $0.5 million or 1% higher than in 2003. Approximately $2.7
million of the increase was due to the effect of foreign currency translation.
This was partially offset by a lower interest rate on the Company’s $150 million
notes that were refinanced in the third quarter of 2003, and lower variable
interest rate borrowings.
Income
Tax Expense from Continuing Operations
2005
vs. 2004
The
increase in 2005 of $15.7 million or 32% in the provision for income taxes
from
continuing operations was primarily due to increased earnings from continuing
operations for the reasons mentioned above, partially offset by a decreased
effective income tax rate. The effective income tax rate relating to continuing
operations for 2005 was 28.1% versus 28.6% for 2004. The decrease related
principally to reduced effective income tax rates on international earnings
and
remittances, partially offset by reduced favorable settlements of tax
contingencies in comparison with 2004. The differences on international earnings
and remittances from 2004 to 2005 included a one-time benefit recorded in the
fourth quarter of 2005 of $2.7 million associated with funds repatriated under
the American Jobs Creation Act of 2004 (AJCA). Additionally, during the fourth
quarter of 2005, consistent with the Company’s strategic plan of investing for
growth at certain international locations, the Company received a one-time
income tax benefit of $3.6 million.
2004
vs. 2003
The
increase in 2004 of $7.3 million or 18% in the provision for income taxes from
continuing operations was primarily due to increased earnings from continuing
operations, partially offset by a decreased effective income tax rate. The
effective income tax rate relating to continuing operations for 2004 was 28.6%
versus 30.7% for 2003. The decrease in the effective income tax rate from 2003
to 2004 was primarily the result of the benefit of foreign tax credits related
to the American Jobs Creation Act of 2004 (AJCA) and the settlement of certain
tax contingencies. The settlements of tax contingencies included the adjustment
of certain U.S. federal and state income tax contingencies due to favorable
outcomes. Additionally, during the fourth quarter of 2004, the Company recorded
a favorable income tax expense adjustment related to prior periods, which was
not material, and which was mostly offset by increases in certain international
tax contingencies, state income taxes and the amount of international earnings
subject to U.S. income taxes.
For
additional information, see Note 9, Income Taxes, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary
Data.”
Income
from Continuing Operations
2005
vs. 2004
Income
from continuing operations in 2005 of $156.8 million was $43.2 million or 38%
higher than 2004. This increase resulted from strong demand for most of the
Company’s services and products (principally from the Access Services Segment
and industrial grating products) that resulted in increased revenues, as well
as
from stringent cost controls and process improvements that contained selling,
general and administrative expenses growth to a level below revenue
growth.
2004
vs. 2003
Income
from continuing operations in 2004 of $113.5 million was $26.5 million or 31%
higher than 2003. This increase primarily resulted from increased revenues,
a
decreased effective income tax rate, stringent cost controls, process
improvements and reorganization actions that contained selling, general and
administrative expenses growth to a 12% increase while revenue increased 18%.
Income
from Discontinued Operations
2005
vs. 2004
Income
from discontinued operations for 2005 decreased $7.8 million or 101% from 2004.
This decrease was attributable principally to after-tax income from the one-time
settlement of the Company’s Federal Excise Tax (FET) litigation in 2004. For
additional information on the FET litigation see Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, Item
8,
"Financial Statements and Supplementary Data,” in the Company’s 2004 Form
10-K.
2004
vs. 2003
Income
from discontinued operations for 2004 increased $2.5 million or 47% from 2003.
This increase was attributable to the following significant items:
|
In
millions
|
Change
in Income from Discontinued Operations 2004 vs.
2003
|
|
$
3.1
|
After-tax
income due to the settlement of the Company’s Federal Excise Tax (FET)
litigation in 2004 compared with after-tax income due to favorable
developments in the FET litigation in 2003. For additional information
on
the FET litigation see Note 10, Commitments and Contingencies, to
the
Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data,” to the Company’s 2004 Form
10-K.
|
|
(0.6)
|
Decline
in after-tax income related to the sale of the Company’s Capitol
Manufacturing business during 2002.
|
|
$
2.5
|
Total
Change in Income from Discontinued Operations 2004 vs.
2003
|
Net
Income and Earnings Per Share
2005
vs. 2004
Net
income of $156.7 million and diluted earnings per share of $3.72 in 2005
exceeded 2004 by $35.4 million and $0.81, respectively, primarily due to
increased income from continuing operations, partially offset by the decrease
in
income from discontinued operations for the reasons described
above.
2004
vs. 2003
Net
income of $121.2 million and diluted earnings per share of $2.91 in 2004
exceeded 2003 by $29.0 million and $0.66, respectively, primarily due to
increased income from both continuing and discontinued operations for the
reasons described above.
Liquidity
and Capital Resources
Overview
Building
on 2004’s record cash provided by operations of $270.5 million, the Company
continued that trend by achieving a record $315.3 million in operating cash
in
2005. This represents a 17% improvement from 2004. This significant source
of
cash in recent years has enabled the Company to invest $290.2 million in capital
expenditures (over one-half of which were for revenue-growth projects) in 2005,
in addition to paying $49.9 million in stockholder dividends. Additionally,
the
Company
received $39.5 million in cash from asset sales in 2005, including the sale
of
the Youngman light-access manufacturing unit in October 2005. The Company almost
doubled its goal of $20 million in asset sales for 2005.
In
2005,
the Company continued with the execution of its strategy of sensible bolt-on
acquisitions to further enhance its industrial services growth, expand its
geographic footprint, and increase Economic Value Added (EVA®). During the year
(principally the fourth quarter), the Company invested $394.5 million in three
strategic acquisitions. These acquisitions were initially financed through
the
U.S. and euro commercial paper programs, and are the main reason for the
increase of $415.4 million in net cash borrowings during 2005. These borrowings
also resulted in an increase in the Company’s total debt to $1.0 billion at
December 31, 2005, 50% of which is variable-rate debt. For additional
information on these acquisitions, see Note 2, Acquisitions and Dispositions,
to
the Consolidated Financial Statements under Part II, Item 8, “Financial
Statements and Supplementary Data.”
The
Company’s strategic objectives for 2006 include generating a record $400 million
in net cash provided by operating activities. The Company has targeted a minimum
of $100 million of discretionary cash flows for debt reduction; however, the
amount of debt reduction will be affected by the timing of growth initiatives
and the amount of asset sales. The Company will continue its strategy to
redeploy excess or discretionary cash in new long-term, high-renewal-rate
service contracts for the Mill Services business and for growth in the Access
Services and railway track maintenance services businesses, and it will continue
to consider sensible bolt-on acquisitions in the industrial services business.
The Company also plans to continue its long and consistent history of paying
dividends to stockholders.
The
Company also intends to focus on improved working capital management.
Specifically, accounts receivable in the Access Services Segment and inventory
levels in the manufacturing businesses will continue to be scrutinized and
challenged to improve the Company’s use of funds.
In
order
to provide increased financial flexibility for potential growth-related
investments and for general corporate requirements, the Company increased its
credit facilities and commercial paper programs during the fourth quarter of
2005 as follows:
|
Summary
of Changes to Credit Facilities and Commercial Paper
Programs
|
|
|
(In
millions)
|
|
September
30, 2005 Facility Limit
|
|
December
31, 2005 Facility Limit
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$
|
350.0
|
|
$
|
400.0
|
|
$
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program (a)
|
|
|
120.5
|
|
|
236.8
|
|
|
116.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility (b)
|
|
|
350.0
|
|
|
450.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
credit facility (b)
|
|
|
—
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (c)
|
|
|
25.0
|
|
|
50.0
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
845.5
|
|
$
|
1,236.8
|
|
$
|
391.3
|
|
|
(a)
|
100
million euros expanded to 200 million
euros
|
|
(c)
|
International-based
program
|
Additionally,
the Company is considering increasing the maximum limit of the U.S. commercial
paper program to $450 million and potentially refinancing some or all of its
outstanding commercial paper with a longer-term facility in the first half
of
2006.
Cash
Requirements
The
following summarizes the Company’s expected future payments related to
contractual obligations and commercial commitments at December 31, 2005.
|
Contractual
Obligations as of December 31, 2005 (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Period
|
|
|
(In
millions)
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
4-5
years
|
|
After
5 years
|
|
|
Short-term
Debt
|
|
$
|
98.0
|
|
$
|
98.0
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt
(including
current maturities and capital leases)
|
|
|
911.9
|
|
|
6.1
|
|
|
18.6
|
|
|
733.8
|
|
|
153.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
interest payments on Long-term Debt (b)
|
|
|
262.3
|
|
|
52.9
|
|
|
97.6
|
|
|
90.9
|
|
|
20.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and Other Post- retirement Obligations (c)
|
|
|
469.1
|
|
|
39.0
|
|
|
81.5
|
|
|
89.9
|
|
|
258.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
|
144.8
|
|
|
41.0
|
|
|
51.7
|
|
|
29.4
|
|
|
22.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
|
113.6
|
|
|
110.4
|
|
|
0.8
|
|
|
2.2
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Forward Exchange Contracts (d)
|
|
|
157.9
|
|
|
157.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual Obligations
|
|
$
|
2,157.6
|
|
$
|
505.3
|
|
$
|
250.2
|
|
$
|
946.2
|
|
$
|
455.9
|
|
|
(a)
|
See
Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8, Employee
Benefit Plans; and Note 13, Financial Instruments, to the Consolidated
Financial Statements under Part II, Item 8, “Financial Statements and
Supplementary Data,” for additional disclosures on short-term and
long-term debt; operating leases; pensions and other postretirement
benefits; and foreign currency forward exchange contracts, respectively.
|
|
(b)
|
The
total projected interest payments on Long-term Debt are based upon
borrowings, interest rates and foreign currency exchange rates as
of
December 31, 2005. The interest rates on variable-rate debt and the
foreign currency exchange rates are subject to changes beyond the
Company’s control and may result in actual interest expense and payments
differing from the amounts projected
above.
|
|
(c)
|
Amounts
represent expected benefit payments for the next 10
years.
|
|
(d)
|
This
amount represents the notional value of the foreign currency exchange
contracts outstanding at December 31, 2005. Due to the nature of
these
transactions, there will be offsetting cash flows to these contracts,
with
the difference recognized as a gain or loss in the consolidated income
statement. See Note 13, Financial Instruments, to the Consolidated
Financial Statements under Part II, Item 8, “Financial Statements and
Supplementary Data.”
|
Off-Balance
Sheet Arrangements - The
following table summarizes the Company’s contingent commercial commitments at
December 31, 2005. These amounts are not included in the Company’s Consolidated
Balance Sheet since there are no current circumstances known to management
indicating that the Company will be required to make payments on these
contingent obligations.
|
Commercial
Commitments as of December 31, 2005
|
|
|
|
|
|
|
Amount
of Commitment Expiration Per Period
|
|
|
(In
millions)
|
|
Total
Amounts
Committed
|
|
Less
Than
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
Over
5
Years
|
|
Indefinite
Expiration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
Letters of Credit
|
|
$
|
113.5
|
|
$
|
104.4
|
|
$
|
9.1
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
|
33.4
|
|
|
10.1
|
|
|
0.7
|
|
|
0.1
|
|
|
0.9
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Bonds
|
|
|
16.2
|
|
|
9.7
|
|
|
0.8
|
|
|
|
|
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Commercial Commitments
|
|
|
12.8
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Commercial Commitments
|
|
$
|
175.9
|
|
$
|
125.9
|
|
$
|
10.6
|
|
$
|
0.1
|
|
$
|
0.9
|
|
$
|
38.4
|
|
As
of
December 31, 2005, there was a decrease in the standby letters of credit and
performance bonds of approximately $88.6 million from the total $218.3 million
outstanding at December 31, 2004. This decrease was due principally to the
release in January 2005 of an $80 million surety bond and a $9 million standby
letter of credit, both related to the Company’s’ settled Federal Excise Tax
(FET) dispute, as previously reported on Form 10-K for 2004.
Certain
guarantees and performance bonds are of a continuous nature and do not have
a
definite expiration date.
Sources
and Uses of Cash
The
Company’s principal sources of liquidity are cash from operations and borrowings
under its various credit agreements, augmented periodically by cash proceeds
from asset sales. The primary drivers of the Company’s cash flow from operations
are the Company’s sales and income, particularly in the services businesses. The
Company’s long-term Mill Services contracts provide predictable cash flows for
several years into the future. (See “Certainty of Cash Flows” section for
additional information on estimated future revenues of Mill Services contracts
and order backlogs for the Company’s manufacturing businesses and railway track
maintenance services business). Additionally, cash returns on capital
investments made in prior years, for which no cash is currently required, are
a
significant source of operating cash. Depreciation expense related to these
investments is a non-cash charge. The Company also continues to maintain working
capital at a manageable level based upon the requirements and seasonality of
the
business.
Major
uses of operating cash flows and borrowed funds include payroll costs and
related benefits; pension funding payments; raw material purchases for the
manufacturing businesses; income tax payments; interest payments; insurance
premiums and payments of self-insured casualty losses; and machinery, equipment,
automobile and facility rental payments. Other primary uses of cash include
capital investments, principally in the industrial services businesses; debt
payments; and dividend payments. Cash will also be used for bolt-on acquisitions
as the appropriate opportunities arise.
Resources
available for cash requirements - The
Company has various credit facilities and commercial paper programs available
for use throughout the world. The following chart illustrates the amounts
outstanding under credit facilities and commercial paper programs and available
credit as of December 31, 2005.
|
Summary
of Credit Facilities and Commercial Paper
Programs
|
|
As
of December 31, 2005
|
|
|
(In
millions)
|
|
Facility
Limit
|
|
Outstanding
Balance
|
|
Available
Credit
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$
|
400.0
|
|
$
|
351.3
|
|
$
|
48.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program
|
|
|
236.8
|
|
|
127.5
|
|
|
109.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility (a)
|
|
|
450.0
|
|
|
|
|
|
450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplement
credit facility (a)
|
|
|
100.0
|
|
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (b)
|
|
|
50.0
|
|
|
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
at December 31, 2005
|
|
$
|
1,236.8
|
|
$
|
478.8
|
|
$
|
758.0
(c
|
)
|
|
(b)
|
International-based
Program
|
|
(c)
|
Although
the Company has significant available credit, it is the Company’s policy
to limit aggregate commercial paper and credit facility borrowings
at any
one time to a maximum of $600 million.
|
See
Note
6, Debt and Credit Agreements, to the Consolidated Financial Statements under
Part II, Item 8, “Financial Statements and Supplementary Data,” for more
information on the Company’s credit facilities.
Credit
Ratings and Outlook - The
following table summarizes the Company's debt ratings as of
December 31, 2005:
|
|
Long-term
Notes
|
U.S.-Based
Commercial
Paper
|
Outlook
|
|
|
|
|
|
|
Standard
& Poor’s (S&P)
|
A-
|
A-2
|
Stable
|
|
Moody’s
|
A3
|
P-2
|
Stable
|
|
Fitch
|
A-
|
F2
|
Stable
|
The
Company’s euro-based commercial paper program has not been rated since the euro
market does not require it. In January 2006, Fitch reaffirmed its A- and F-2
ratings for the Company’s long-term notes and U.S. commercial paper,
respectively, and its stable outlook. S&P and Moody’s reaffirmed their
ratings for the Company in December 2005. A downgrade to the Company’s credit
rating would probably increase the costs to the Company to borrow funds. An
improvement in the Company’s credit rating would probably decrease the costs to
the Company to borrow funds.
Working
Capital Position - Changes
in the Company’s working capital are reflected in the following
table:
|
(Dollars
are in millions)
|
|
December
31
2005
|
|
December
31
2004
|
|
Increase
(Decrease)
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
120.9
|
|
$
|
94.1
|
|
$
|
26.8
|
|
|
Accounts
receivable, net
|
|
|
666.3
|
|
|
555.2
|
|
|
111.1
|
|
|
Inventories
|
|
|
251.1
|
|
|
217.0
|
|
|
34.1
|
|
|
Other
current assets
|
|
|
60.4
|
|
|
58.6
|
|
|
1.8
|
|
|
Assets
held for sale
|
|
|
2.3
|
|
|
1.0
|
|
|
1.3
|
|
|
Total
current assets
|
|
|
1,101.0
|
|
|
925.9
|
|
|
175.1
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable and current maturities
|
|
|
104.0
|
|
|
31.1
|
|
|
72.9
|
|
|
Accounts
payable
|
|
|
247.2
|
|
|
220.3
|
|
|
26.9
|
|
|
Accrued
compensation
|
|
|
75.7
|
|
|
63.8
|
|
|
11.9
|
|
|
Income
taxes
|
|
|
42.3
|
|
|
40.2
|
|
|
2.1
|
|
|
Other
current liabilities
|
|
|
279.2
|
|
|
223.0
|
|
|
56.2
|
|
|
Liabilities
associated with assets held for sale
|
|
|
|
|
|
0.7
|
|
|
(0.7
|
)
|
|
Total
current liabilities
|
|
|
748.4
|
|
|
579.1
|
|
|
169.3
|
|
|
Working
Capital
|
|
$
|
352.6
|
|
$
|
346.8
|
|
$
|
5.8
|
|
|
Current
Ratio
|
|
|
1.5:1
|
|
|
1.6:1
|
|
|
|
|
Working
capital increased 2% in 2005 due principally to the effect of the Hünnebeck and
BISNH acquisitions and, to a lesser extent, increased sales activity, partially
offset by negative foreign currency translation. Changes to specific working
capital components in 2005 were due to the following factors:
· |
Cash
increased by $26.8 million as of December 31, 2005 due principally
to
acquisitions.
|
· |
Net
receivables increased by $111.1 million in 2005. This increase was
principally due to acquisitions and increases in insurance receivables
(primarily related to claims covered by third-party insurance). Partially
offsetting these increases were decreases in the Access Services
Segment
due to divestitures of the Youngman operations and negative foreign
currency translation related to the weakening of the British pound
sterling.
|
· |
Inventory
increased by $34.1 million in 2005 due principally to acquisitions.
|
· |
Notes
payable and current maturities increased $72.9 million in 2005 due
principally to the increase in net cash borrowings for the acquisitions,
a
portion of which has been classified to current based on the Company’s
intent and ability to repay it in
2006.
|
· |
Accounts
payable increased $26.9 million in 2005. This increase was due principally
to acquisitions. Partially offsetting this increase were decreases
in the
Mill Services and Access Services Segments due to negative foreign
currency translation and the timing of payments.
|
· |
Other
current liabilities increased $56.2 million in 2005. This increase
was due
principally to acquisitions and increases in accrued insurance liabilities
(primarily related to claims covered by third-party
insurance).
|
Certainty
of Cash Flows - The
certainty of the Company’s future cash flows is underpinned by the long-term
nature of the Company’s mill services contracts. At December 31, 2005, the
Company’s mill services contracts had estimated future revenues of $4.3 billion,
compared with $3.7 billion as of December 31, 2004. This increase is principally
due to the acquisition of BISNH. In addition, as of December 31, 2005, the
Company had an order backlog of $275.8 million for its manufacturing businesses
and railway track maintenance services, compared with $243.0 million as of
December 31, 2004. This increase is due principally to new railway track
maintenance services contracts and new orders for heat exchangers partially
offset by decreased orders for railway track maintenance equipment in the
Engineered Products and Services (“all other”) Category. The railway track
maintenance services and equipment business backlog includes a significant
portion that is long-term, which will not be realized until 2007 and later
due
to the long lead times necessary to build certain equipment, and the long-term
nature of certain service contracts. Backlog for scaffolding, shoring and
forming services and for roofing granules and slag abrasives is not included
in
the total backlog because it is generally not quantifiable, due to the timing
and nature of the products and services provided.
The
types
of products and services that the Company provides are not subject to rapid
technological change, which increases the stability of related cash flows.
Additionally, each of the Company’s businesses is among the top three companies
(relative to sales) in the industries and markets the Company serves. Due to
these factors, the Company is confident in its future ability to generate
positive cash flows from operations.
Cash
Flow Summary
The
Company’s cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, are summarized in the
following table:
Summarized
Cash Flow Information
|
(In
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
315.3
|
|
$
|
270.5
|
|
$
|
262.8
|
|
|
Investing
activities
|
|
|
(645.2
|
)
|
|
(209.6
|
)
|
|
(144.8
|
)
|
|
Financing
activities
|
|
|
369.3
|
|
|
(56.5
|
)
|
|
(125.5
|
)
|
|
Effect
of exchange rate changes on cash
|
|
|
(12.6
|
)
|
|
9.5
|
|
|
17.6
|
|
|
Net
change in cash and cash equivalents
|
|
$
|
26.8
|
|
$
|
13.9
|
|
$
|
10.1
|
|
Cash
From Operating Activities -
Net cash
provided by operating activities in 2005 was a record $315.3 million, an
increase of $44.8 million from 2004. The increased cash from operations in
2005
resulted from the following factors:
· |
Increased
net income in 2005 compared with 2004.
|
· |
The
timing of accounts receivable collections at the railway track maintenance
services and equipment business and Gas Technologies businesses,
partially
offset by the timing of receipts on third-party insurance claims
and the
timing of cash collections in the Mill Services business, resulting
in a
positive effect on cash from operations for 2005. The increase in
receivables due to third-party insurance claims was directly offset
by an
increase in insurance liabilities.
|
· |
Partially
offsetting the above improvements was the timing of cash payments
to
vendors in the railway track maintenance services and equipment business
and Mill Services business, somewhat offset by favorable timing
differences in the Gas Technologies business.
|
Cash
Used in Investing Activities - Capital
investments in 2005 were a record $290.2 million, an increase of $86 million
from 2004. Investments were made predominantly for the industrial services
businesses with 54% in the Mill Services Segment and 30% in the Access Services
Segment. The Company also invested $394.5 million principally for two
acquisitions, one in Mill Services and the other in Access Services. Mill
Services acquisitions included BISNH and the smaller France-based Evulca. The
Access Services acquisition was the Germany-based Hünnebeck Group GmbH. See
Note
2,
Acquisitions and Dispositions, to the Consolidated Financial Statements under
Part II, Item 8, “Financial Statements and Supplementary Data,” for additional
disclosures related to these items.
Cash
Used in Financing Activities -
The
following table summarizes the Company’s debt and capital positions as of
December 31, 2005.
|
(Dollars
are in millions)
|
|
December
31
2005
|
|
December
31
2004
|
|
|
Notes
Payable and Current Maturities
|
|
$
|
104.0
|
|
$
|
31.1
|
|
|
Long-term
Debt
|
|
|
905.9
|
|
|
594.7
|
|
|
Total
Debt
|
|
|
1,009.9
|
|
|
625.8
|
|
|
Total
Equity
|
|
|
993.9
|
|
|
914.2
|
|
|
Total
Capital
|
|
$
|
2,003.9
(a
|
)
|
$
|
1,540.0
|
|
|
Total
Debt to Total Capital
|
|
|
50.4
|
%
|
|
40.6
|
%
|
(a)
Does
not
total due to rounding.
The
Company’s debt as a percentage of total capital increased in 2005 due
principally to the increase in net cash borrowings related to the acquisitions.
Partially offsetting the increase in this ratio was the increase in total
equity. The increase in total equity was principally due to increased net
income, and was partially offset by negative foreign currency translation
adjustments. Due to the Company’s significant net investments in Continental
Europe and the United Kingdom, the strengthening of the U.S. dollar in relation
to the euro and the British pound sterling had a negative effect on total
equity.
Debt
Covenants
The
Company’s credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt
to
capital ratio of 60%. Based on balances at December 31, 2005, the Company could
increase borrowings by approximately $479.3 million and still be within its
debt
covenants. Alternatively, keeping all other factors constant, the Company’s
equity could decrease by approximately $321.0 million and the Company would
still be within its covenants. Additionally, the Company’s 7.25% British pound
sterling-denominated notes due October 27, 2010 include a covenant that permits
the note holders to redeem their notes, at par, in the event of a change of
control of the Company. The Company expects to be compliant with these debt
covenants one year from now.
Cash
and Value-Based Management
The
Company plans to continue with its strategy of selective investing for strategic
purposes for the foreseeable future. The goal of this strategy is to improve
the
Company’s Economic Value Added (EVA®) under the program that commenced January
1, 2002. Under this program the Company evaluates strategic investments based
upon the investment’s economic profit. EVA equals after-tax operating profits
less a charge for the use of the capital employed to create those profits (only
the service cost portion of pension expense is included for EVA purposes).
Therefore, value is created when a project or initiative produces a return
above
the cost of capital. In 2005, eight of the Company’s nine divisions improved
their EVA from the comparable 2004 period. The EVA discipline will continue
to
be used to evaluate potential acquisitions to ensure stockholder value is
maximized.
The
Company is committed to continue paying dividends to stockholders. The Company
has increased the dividend rate for twelve consecutive years, and in February
2006, the Company paid its 223rd
consecutive quarterly cash dividend. The Company also plans to continue paying
down debt to the extent possible. Additionally, the Company has authorization
to
repurchase up to one million of its shares through January 31,
2007.
The
Company's financial position and debt capacity should enable it to meet current
and future requirements. As additional resources are needed, the Company should
be able to obtain funds readily and at competitive costs. The Company is
well-positioned and intends to continue investing strategically in high-return
projects and acquisitions, reducing debt, to the extent possible, and paying
cash dividends as a means to enhance stockholder value.
Application
of Critical Accounting Policies
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the consolidated financial statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure
of
contingent
liabilities. On an on-going basis the Company evaluates its estimates, including
those related to pensions and other postretirement benefits, bad debts, goodwill
valuation, long-lived asset valuations, inventory valuations, insurance
accruals, contingencies and income taxes. The impact of changes in these
estimates, as necessary, is reflected in the respective segment’s operating
income. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. Management has discussed the development and selection
of
the critical accounting estimates described below with the Audit Committee
of
the Board of Directors and the Audit Committee has reviewed the Company’s
disclosure relating to these estimates in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations. These items should
be
read in conjunction with Note 1, Summary of Significant Accounting Policies,
to
the Consolidated Financial Statements under Part II, Item 8, “Financial
Statements and Supplementary Data.”
Pension
Benefits
The
Company has defined benefit pension plans in several countries. The largest
of
these plans are in the United Kingdom and the United States. The Company’s
funding policy for these plans is to contribute amounts sufficient to meet
the
minimum funding pursuant to U.K. and U.S. statutory requirements, plus any
additional amounts that the Company may determine to be appropriate. The Company
made cash contributions to its defined benefit pension plans of $48.8 million
(including $16.9 million of discretionary payments) and $37.8 million (including
a $10.6 million discretionary payment) during 2005 and 2004, respectively.
Additionally, the Company expects to make a minimum of $20.8 million in cash
contributions to its defined benefit pension plans during 2006.
The
Company accounts for its defined benefit pension plans in accordance with SFAS
No. 87, “Employer’s Accounting for Pensions” (SFAS 87), which requires that
amounts recognized in financial statements be determined on an actuarial basis.
A minimum liability is required to be established on the Consolidated Balance
Sheet representing the amount of unfunded accumulated benefit obligation. The
unfunded accumulated benefit obligation is the difference between the
accumulated benefit obligation and the fair value of the plan assets at the
measurement date. When it is necessary to establish an additional minimum
pension liability, an equal amount is recorded as an intangible pension asset,
limited to unrecognized prior service cost. Any excess amount is recorded as
a
reduction to Stockholders’ Equity in Accumulated other comprehensive loss, net
of deferred income taxes, in the Consolidated Balance Sheet. At December 31,
2005 and 2004, the Company has a gross minimum pension liability of $215.0
million and $239.3 million, respectively. These adjustments impacted Accumulated
other comprehensive loss in the Stockholders’ Equity section of the Consolidated
Balance Sheets by $14.7 million of comprehensive income, net of deferred income
taxes, and $4.5 million of comprehensive loss, net of deferred income taxes,
at
December 31, 2005 and 2004, respectively. When and if the fair market value
of
the pension plans’ assets exceed the accumulated benefit obligation, the
reduction to Stockholders’ Equity would be fully restored to the Consolidated
Balance Sheet.
Management
implemented a three-part strategy to deal with the adverse market forces that
have increased the unfunded benefit obligations over the last several years.
These strategies included pension plan design changes, a review of funding
policy alternatives and a review of the asset allocation policy and investment
manager structure. With regards to plan design, the Company amended a majority
of the U.S. defined benefit pension plans and certain international defined
benefit pension plans so that accrued service is no longer granted for periods
after December 31, 2003, although compensation increases will continue to be
recognized on actual service to-date (for the U.S. plans this is limited to
10
years - through December 2013). In place of these plans, the Company
established, effective January 1, 2004, defined contribution pension plans
providing for the Company to contribute a specified matching amount for
participating employees’ contributions to the plan. Domestically, this match is
made on employee contributions up to four percent of their eligible
compensation. Additionally, the Company may provide a discretionary contribution
of up to two percent of compensation for eligible employees. Internationally,
this match is up to six percent of eligible compensation with an additional
two
percent going towards insurance and administrative costs. The Company believes
these new retirement benefit plans will provide a more predictable and less
volatile pension expense than existed under the defined benefit plans.
The
Company’s pension committee continues to evaluate alternative strategies to
further reduce overall pension expense including the on-going evaluation of
investment fund managers’ performance; the balancing of plan assets and
liabilities; the risk assessment of all multi-employer pension plans; the
possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that could reduce future
pension expense volatility and minimize risk.
Critical
Estimate - Defined Benefit Pension Benefits
Accounting
for defined benefit pensions and other postretirement benefits requires the
use
of actuarial assumptions. The principal assumptions used include the discount
rate and the expected long-term rate of return on plan assets. Each assumption
is reviewed annually and represents management’s best estimate at that time. The
assumptions are selected to represent the average expected experience over
time
and may differ in any one year from actual experience due to changes in capital
markets and the overall economy. These differences will impact the amount of
unfunded benefit obligation and the expense recognized.
The
discount rates as of the September 30, 2005 measurement date for the U.K.
defined benefit pension plan and the October 31, 2005 measurement date for
the
U.S. defined benefit pension plans were 5.25% and 5.87%, respectively. These
rates were used in calculating the Company's projected benefit obligations
as of
December 31, 2005. The discount rates selected represent the average yield
on
high-quality corporate bonds as of the measurement dates. The global
weighted-average of these assumed discount rates for the years ending December
31, 2005, December 31, 2004 and December 31, 2003 were 5.3%, 5.7% and 5.9%,
respectively. Annual pension expense is determined using the discount rate
as of
the beginning of the year, which for 2006 is the 5.3% global weighted-average
discount rate. Pension expense and the projected benefit obligation generally
increase as the selected discount rate decreases.
The
expected long-term rate of return on plan assets is determined by evaluating
the
portfolios’ asset class return expectations with the Company’s advisors as well
as actual, long-term, historical results of asset returns for the pension plans.
The pension expense increases as the expected long-term rate of return on assets
decreases. For 2005, the global weighted-average expected long-term rate of
return on asset assumption was 7.8%. For 2006, the expected global long-term
rate of return on assets has been reduced to 7.6%. This rate was determined
based on a model of expected asset returns for an actively managed
portfolio.
Based
on
the updated actuarial assumptions and the structural changes in the pension
plans mentioned previously, the Company’s 2006 pension expense is expected to
stabilize. Total pension expense decreased from 2004 to 2005 by $1.7 million
due
principally to lower defined benefit pension expense in the United Kingdom.
This
resulted from plan design changes in 2004 when certain defined benefit plans
were replaced by defined contribution plans. Total pension expense increased
from 2003 to 2004 by $6.4 million due to lower interest rates, the effect of
foreign currency translation, increased expenses for multi-employer pension
plans due to the change in the Company’s revenue mix and higher defined
contribution pension expense. These increases were partially offset by a
decrease of approximately $5.6 million in defined benefit pension expense due
to
the design changes made to those plans.
Changes
in pension benefit expense may occur in the future due to changes in actuarial
assumptions and due to changes in returns on plan assets resulting from
financial market conditions. Holding all other assumptions constant, a one-half
percent increase or decrease in the discount rate and the expected long-term
rate of return on plan assets would increase or decrease annual 2006 pre-tax
defined benefit pension expense as follows:
|
|
Approximate
Changes in Pre-tax Defined Benefit
Pension
Expense
|
|
|
U.S.
Plans
|
|
U.K.
Plan
|
|
Discount
rate
|
|
|
|
|
|
|
|
|
|
One-half
percent increase
|
Decrease
of $1.8 million
|
|
Decrease
of $4.8 million
|
|
One-half
percent decrease
|
Increase
of $2.0 million
|
|
Increase
of $5.2 million
|
|
|
|
|
|
|
Expected
long-term rate of return on plan assets
|
|
|
|
|
|
|
|
|
|
One-half
percent increase
|
Decrease
of $1.2 million
|
|
Decrease
of $3.0 million
|
|
One-half
percent decrease
|
Increase
of $1.2 million
|
|
Increase
of $3.0 million
|
Should
circumstances change that affect these estimates, changes (either increases
or
decreases) to the net pension obligations may be required and would be recorded
in accordance with the provisions of SFAS 87. Additionally, certain events
could
result in the pension obligation changing at a time other than the annual
measurement date. This would occur when the benefit plan is amended or when
plan
curtailments occur.
See
Note
8, Employee Benefit Plans, to the Consolidated Financial Statements under Part
II, Item 8, “Financial Statements and Supplementary Data,” for additional
disclosures related to these items.
Notes
and Accounts Receivable
Notes
and
accounts receivable are stated at their net realizable value through the use
of
an allowance for doubtful accounts. The allowance is maintained for estimated
losses resulting from the inability or unwillingness of customers to make
required payments. The Company has policies and procedures in place requiring
customers to be evaluated for creditworthiness prior to the execution of new
service contracts or shipments of products. These reviews are structured to
minimize the Company’s risk related to realizability of its receivables. Despite
these policies and procedures, the Company may still experience collection
problems and potential bad debts due to economic conditions within certain
industries (e.g., construction and steel industries) and countries and regions
in which the Company operates. As of December 31, 2005 and 2004, receivables
of
$666.3 million and $555.2 million, respectively, were net of reserves of $24.4
million and $19.1 million, respectively. The increase in reserves from December
31, 2004 related principally to the acquisition of businesses.
Critical
Estimate - Notes and Accounts Receivable
A
considerable amount of judgment is required to assess the realizability of
receivables, including the current creditworthiness of each customer, related
aging of the past due balances and the facts and circumstances surrounding
any
non-payment. The Company’s provisions for bad debts during 2005, 2004 and 2003
were $6.5 million, $5.0 million and $3.4 million, respectively.
On
a
monthly basis, customer accounts are analyzed for collectibility. Reserves
are
established based upon a specific-identification method as well as historical
collection experience, as appropriate. The Company also evaluates specific
accounts when it becomes aware of a situation in which a customer may not be
able to meet its financial obligations due to a deterioration in its financial
condition, credit ratings or bankruptcy. The reserve requirements are based
on
the facts available to the Company and are re-evaluated and adjusted as
additional information is received. Reserves are also determined by using
percentages (based upon experience) applied to certain aged receivable
categories. Specific issues are discussed with Corporate Management and any
significant changes in reserve amounts or the write-off of balances must be
approved by a specifically designated Corporate Officer. All approved items
are
monitored to ensure they are recorded in the proper period. Additionally, any
significant changes in reserve balances are reviewed to ensure the proper
Corporate approval has occurred.
If
the
financial condition of the Company's customers were to deteriorate, resulting
in
an impairment of their ability to make payments, additional allowances may
be
required. Conversely, an improvement in a customer’s ability to make payments
could result in a decrease of the allowance for doubtful accounts. Changes
in
the allowance related to both of these situations would be recorded through
income in the period the change was determined.
The
Company has not materially changed its methodology for calculating allowances
for doubtful accounts for the years presented.
See
Note
3, Accounts Receivable and Inventories, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data,” for
additional disclosures related to these items.
Goodwill
The
Company’s net goodwill balances were $559.6 million and $433.1 million, as of
December 31, 2005 and 2004, respectively. Goodwill is not amortized but tested
for impairment at the reporting unit level on an annual basis, and between
annual tests whenever events or circumstances indicate that the carrying value
of a reporting unit’s goodwill may exceed its fair value.
Critical
Estimate - Goodwill
A
discounted cash flow model is used to estimate the fair value of a reporting
unit. This model requires the use of long-term planning estimates and
assumptions regarding industry-specific economic conditions that are outside
the
control of the Company. The annual test for impairment includes the selection
of
an appropriate discount rate to value cash flow information. The basis of this
discount rate calculation is derived from several internal and external factors.
These factors include, but are not limited to, the average market price of
the
Company’s stock, the number of shares of stock outstanding, the book value of
the Company’s debt, a long-term risk-free interest rate, and both market and
size-specific risk premiums. The Company’s annual goodwill impairment testing,
performed as of October 1, 2005 and 2004, indicated that the fair value of
all
reporting units tested exceeded their respective book values and therefore
no
additional goodwill impairment testing was required. Due to uncertain market
conditions, it is possible that estimates used for goodwill impairment testing
may change in the future. Therefore, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
The
Company has not materially changed its methodology for goodwill impairment
testing for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described
above.
See
Note
5, Goodwill and Other Intangible Assets, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary Data,”
for additional information on goodwill and other intangible assets.
Asset
Impairment
Long-lived
assets are reviewed for impairment when events and circumstances indicate that
the book value of an asset may be impaired. The
amounts charged against pre-tax income related to impaired long-lived assets
were $0.6 million, $0.4 million and $0.1 million in 2005, 2004 and 2003,
respectively.
Critical
Estimate - Asset Impairment
The
determination of a long-lived asset impairment loss involves significant
judgments based upon short and long-term projections of future asset
performance. Impairment loss estimates are based upon the difference between
the
book value and the fair value of the asset. The fair value is generally based
upon the Company’s estimate of the amount that the assets could be bought
or
sold for in a current transaction between willing parties. If quoted market
prices for the asset or similar assets are unavailable, the fair value estimate
is generally calculated using a discounted cash flow model. Should
circumstances change that affect these estimates, additional impairment charges
may be required and would be recorded through income in the period the change
was determined.
The
Company has not materially changed its methodology for calculating asset
impairments for the years presented. There are currently no known trends,
demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described
above.
Inventories
Inventories
are stated at the lower of cost or market. Inventory balances are adjusted
for
estimated obsolete or unmarketable inventory equal to the difference between
the
cost of inventory and its estimated market value. At December 31, 2005 and
2004,
inventories of $251.1 million and $217.0 million, respectively, are net of
lower
of cost or market reserves of $3.2 million and $0.9 million,
respectively.
Critical
Estimate - Inventories
In
assessing the ultimate realization of inventory balance amounts, the Company
is
required to make judgments as to future demand requirements and compare these
with the current or committed inventory levels. If actual market conditions
are
determined to be less favorable than those projected by management, additional
inventory write-downs may be required and would be recorded through income
in
the period the determination is made. Additionally, the Company records reserves
to adjust a substantial portion of its U.S. inventory balances to the last-in,
first-out (LIFO) method of inventory valuation. In adjusting these reserves
throughout the year, the Company estimates its year-end inventory costs and
quantities. At December 31 of each year, the reserves are adjusted to reflect
actual year-end inventory costs and quantities. During periods of inflation,
the
LIFO expense usually increases and during periods of deflation it decreases.
These adjustments resulted in pre-tax income/(expense) of $1.7 million, $(4.3)
million and $1.5 million in 2005, 2004 and 2003, respectively.
The
Company has not materially changed its methodology for calculating inventory
reserves for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described
above.
See
Note
3, Accounts Receivable and Inventories, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data,” for
additional disclosures related to these items.
Insurance
Reserves
The
Company retains a significant portion of the risk for property, workers'
compensation, U.K. employers’ liability, automobile, general and product
liability losses. At December 31, 2005 and 2004 the Company has recorded
liabilities of $102.3 million and $77.4 million, respectively, related to both
asserted as well as unasserted insurance claims. At December 31, 2005, $25.2
million is included in insurance liabilities related to claims covered by
insurance carriers for which a corresponding receivable has been recorded.
There
were no such liabilities recognized as of December 31, 2004 since there were
no
probable claim amounts in excess of the Company’s deductible limits.
Critical
Estimate - Insurance Reserves
Reserves
have been recorded based upon actuarial calculations which reflect the
undiscounted estimated liabilities for ultimate losses including claims incurred
but not reported. Inherent in these estimates are assumptions which are based
on
the Company’s history of claims and losses, a detailed analysis of existing
claims with respect to potential value, and current legal and legislative
trends. If actual claims differ from those projected by management, changes
(either increases or decreases) to insurance reserves may be required and would
be recorded through income in the period the change was determined. During
2005,
2004 and 2003, the Company recorded retrospective insurance reserve adjustments
that decreased pre-tax insurance expense for self-insured programs by $4.1
million, $2.7 million and $5.7 million, respectively. The adjustments resulted
from improved claims experience, aggressive claim and insured litigation
management programs and an improved focus on workplace safety.
The
Company has not materially changed its methodology for calculating insurance
reserves for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described
above.
Legal
and Other Contingencies
Reserves
for contingent liabilities are recorded when it is probable that an asset has
been impaired or a liability has been incurred and the loss can be reasonably
estimated. Adjustments to estimated amounts are recorded as necessary based
on
new information or the occurrence of new events or the resolution of an
uncertainty. Such adjustments are recorded in the period that the required
change is identified.
Critical
Estimate - Legal and Other Contingencies
On
a
quarterly basis, recorded contingent liabilities are analyzed to determine
if
any adjustments are required. Additionally, functional department heads within
each business unit are consulted monthly to ensure all issues with a potential
financial accounting impact, including possible reserves for contingent
liabilities have been properly identified, addressed or disposed of. Specific
issues are discussed with Corporate Management and any significant changes
in
reserve amounts or the adjustment or write-off of previously recorded balances
must be approved by a specifically designated Corporate Officer. If necessary,
outside legal counsel, other third parties or internal experts are consulted
to
assess the likelihood and range of outcomes for a particular issue. All approved
changes in reserve amounts are monitored to ensure they are recorded in the
proper period. Additionally, any significant changes in reported business unit
reserve balances are reviewed to ensure the proper Corporate approval has
occurred. On a quarterly basis, the Company’s business units submit a reserve
listing to the Corporate headquarters which is reviewed in detail. All
significant reserve balances are discussed with a designated Corporate Officer
to assess their validity, accuracy and completeness. Anticipated changes in
reserves are identified for follow-up prior to the end of a reporting period.
Any new issues that may require a reserve are also identified and discussed
to
ensure proper disposition. Additionally, on a quarterly basis, all significant
environmental reserve balances or issues are evaluated to assess their validity,
accuracy and completeness.
The
Company has not materially changed its methodology for calculating legal and
other contingencies for the years presented. There are currently no known
trends, demands, commitments, events or uncertainties that are reasonably likely
to occur that would materially affect the methodology or assumptions described
above.
See
Note
10, Commitments and Contingencies, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data,” for
additional disclosure on this uncertainty and other contingencies.
Income
Taxes
The
Company is subject to various federal, state and local income taxes in the
taxing jurisdictions where the Company operates. At the end of each quarterly
period, the Company makes its best estimate of the annual effective income
tax
rate and applies that rate to year-to-date pre-tax income to arrive at the
year-to-date income tax provision. Income tax loss contingencies are recorded
in
the period when it is determined that it is probable that a liability has been
incurred and the loss can be reasonably estimated. Adjustments to estimated
amounts are recorded as necessary based upon new information, the occurrence
of
new events or the resolution of an uncertainty. As of December 31, 2005, 2004
and 2003, the Company’s net effective income tax rate was 28.1%, 29.1% and
31.0%, respectively.
A
valuation allowance to reduce deferred tax assets is evaluated on a quarterly
basis. The valuation allowance is principally for tax-loss carryforwards
which
are uncertain as to realizability. The valuation allowance was $21.7 million
and
$17.5 million as of December 31, 2005 and 2004, respectively.
Critical
Estimate - Income Taxes
The
annual effective income tax rates are developed giving recognition to tax rates,
tax holidays, tax credits and capital losses, as well as certain exempt income
and non-deductible expenses in all of the jurisdictions where the Company does
business. The income tax provision for the quarterly period is the change in
the
year-to-date provision from the previous quarterly period.
The
Company considers future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance. In the
event the Company were to determine that it would more likely than not be able
to realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company determine
that
it would not be able to realize all or part of its net deferred tax assets
in
the future, an adjustment to the deferred tax assets would decrease income
in
the period in which such determination was made.
The
Company has not materially changed its methodology for calculating income tax
expense for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described
above.
See
Note
9, Income Taxes, to the Consolidated Financial Statements under Part II, Item
8,
“Financial Statements and Supplementary Data,” for additional disclosures
related to these items.
New
Financial Accounting Standards Issued
See
Note
1, Summary of Significant Accounting Policies, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary Data,”
for disclosures on new financial accounting standards issued and their effect
on
the Company.
Research
and Development
The
Company invested $2.7 million, $2.6 million and $3.3 million in internal
research and development programs in 2005, 2004 and 2003, respectively. Internal
funding for research and development was as follows:
|
|
|
Research
and Development Expense
|
|
|
(In
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
Mill
Services Segment
|
|
$
|
1.4
|
|
$
|
1.3
|
|
$
|
1.3
|
|
|
Access
Services Segment
|
|
|
0.5
|
|
|
0.4
|
|
|
0.5
|
|
|
Gas
Technologies Segment
|
|
|
0.2
|
|
|
0.3
|
|
|
0.6
|
|
|
Segment
Totals
|
|
|
2.1
|
|
|
2.0
|
|
|
2.4
|
|
|
Engineered
Products and Services (“all other”) Category
|
|
|
0.6
|
|
|
0.6
|
|
|
0.9
|
|
|
Consolidated
Totals
|
|
$
|
2.7
|
|
$
|
2.6
|
|
$
|
3.3
|
|
Backlog
As
of
December 31, 2005, the Company’s order backlog, exclusive of long-term mill
services contracts, access services and roofing granules and slag abrasives,
was
$275.8 million compared with $243.0 million as of December 31, 2004, a 13%
increase.
|
|
|
Order
Backlog
|
|
|
(In
millions)
|
|
2005
|
|
2004
|
|
|
Gas
Technologies Segment
|
|
$
|
45.2
|
|
$
|
48.7
|
|
|
Engineered
Products and Services (“all other”) Category
|
|
|
230.6
|
|
|
194.3
|
|
|
Consolidated
Backlog
|
|
$
|
275.8
|
|
$
|
243.0
|
|
The
Gas
Technologies Segment order backlog at December 31, 2005 was 7% below the
December 31, 2004 order backlog. The change primarily reflects decreased order
backlog for propane gas tanks.
Order
backlog for the Engineered Products and Services (“all other”) Category at
December 31, 2005 was 19% above the December 31, 2004 order backlog. The change
is principally due to increased order backlog of air-cooled heat exchangers
and
railway track
maintenance
services, partially offset by decreased order backlog of railway track
maintenance equipment. Order backlog for roofing granules and slag abrasives
is
excluded from the above amounts. Order backlog amounts for that product group
are generally not quantifiable due to the nature and timing of the products
provided.
Mill
services contracts have an estimated future value of $4.3 billion at December
31, 2005 compared with $3.7 billion at December 31, 2004. Approximately 58%
of
these revenues are expected to be recognized by December 31, 2008. The remaining
revenues are expected to be recognized between January 1, 2009 and December
31,
2014.
Order
backlog for scaffolding, shoring and forming services of the Access Services
Segment is excluded from the above amounts. These amounts are generally not
quantifiable due to the nature and timing of the products and services provided.
Dividend
Action
The
Company paid four quarterly cash dividends of $0.30 per share in 2005, for
an
annual rate of $1.20. This is an increase of 9.1% from 2004. At the November
2005 meeting, the Board of Directors increased the dividend by 8.3% to an annual
rate of $1.30 per share. The Board normally reviews the dividend rate
periodically during the year and annually at its November meeting. There are
no
material restrictions on the payment of dividends.
The
February 2006 payment marked the 223rd consecutive quarterly dividend paid
at
the same or at an increased rate. In 2005, 32% of net earnings were paid out
in
dividends. The Company is philosophically committed to maintaining or increasing
the dividend at a sustainable level. The Company has paid dividends each year
since 1939.
See
Part
I, Item 1A, “Risk Factors,” for quantitative and qualitative disclosures about
market risk.
|
Index
to Consolidated Financial Statements and Supplementary
Data
|
|
|
|
|
|
|
Page
|
|
Consolidated
Financial Statements of Harsco Corporation:
|
|
|
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
46
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
47
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
December
31, 2005 and 2004
|
49
|
|
|
|
|
Consolidated
Statements of Income
|
|
|
for
the years 2005, 2004 and 2003
|
50
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
for
the years 2005, 2004 and 2003
|
51
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
|
|
for
the years 2005, 2004 and 2003
|
52
|
|
|
|
|
Consolidated
Statements of Comprehensive Income
|
|
|
for
the years 2005, 2004 and 2003
|
53
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
54
|
|
|
|
|
Supplementary
Data (Unaudited):
|
|
|
|
|
|
Two-Year
Summary of Quarterly Results
|
88
|
|
|
|
|
Common
Stock Price and Dividend Information
|
88
|
|
|
|
Management’s
Report on Internal Control Over
Financial
Reporting
Management
of Harsco Corporation, together with its consolidated subsidiaries (the
Company), is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s principal
executive and principal financial officers to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company’s financial statements for external reporting purposes in accordance
with U.S. generally accepted accounting principles.
The
Company’s internal control over financial reporting includes policies and
procedures that:
· |
Pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect transactions and dispositions of assets of the
Company;
|
· |
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures
of the
Company are being made only in accordance with authorizations of
management and the directors of the Company; and
|
· |
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the Company’s financial statements.
|
Management
has assessed the effectiveness of its internal control over financial reporting
as of December 31, 2005 based on the framework established in Internal
Control — Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management has determined that the Company’s internal
control over financial reporting is effective as of December 31, 2005. As
permitted by SEC rules and regulations, the Company’s management has excluded
Hünnebeck Group GmbH and the Northern Hemisphere mill services operations of
Brambles Industrial Services (“BISNH”) from its assessment of internal control
over financial reporting as of December 31, 2005 because they were acquired
in
November and December 2005, respectively. Total assets and total revenues for
these acquisitions represented 18% and 1%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December
31, 2005. Additional information on these acquisitions is provided in Note
2,
“Acquisitions and Dispositions.”
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as
stated in their report appearing below, which expresses unqualified opinions
on
management’s assessment and on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005.
|
|
|
|
/s/ Derek
C.
Hathaway |
|
|
/s/ Salvatore
D. Fazzolari |
|
|
|
|
Derek
C. Hathaway
Chairman
and Chief
Executive Officer March 13, 2006
|
|
|
Salvatore
D.
Fazzolari
President,
Chief
Financial Officer and Treasurer March 13,
2006
|
Report
of Independent Registered Public Accounting Firm
To
Stockholders of Harsco Corporation:
We
have
completed integrated audits of Harsco’s 2005 and 2004 consolidated financial
statements and of its internal control over financial reporting as of December
31, 2005, and an audit of its 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented
below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Harsco
Corporation and its subsidiaries at December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(a)2 presents
fairly, in all material respects, the information set forth therein when read
in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We
conducted our audits of these statements in accordance with the standards of
the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in the accompanying “Management’s
Report on Internal Control Over Financial Reporting,” that the Company
maintained effective internal control over financial reporting as of December
31, 2005 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of
management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
described in "Management's Report on Internal Control Over Financial Reporting,”
management has excluded Hünnebeck Group GmbH (“Hünnebeck”) and the Northern
Hemisphere mill services operations of Brambles Industrial Services (“BISNH”)
from its assessment of internal control over financial reporting as of
December 31, 2005 because they were acquired by the Company in purchase
business combinations during 2005. Hünnebeck and BISNH total assets and total
revenues represent 18% and 1%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31,
2005.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Philadelphia,
Pennsylvania
March
13,
2006
HARSCO
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
December
31
2005
|
|
December
31
2004
(a)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
120,929
|
|
$
|
94,093
|
|
Accounts
receivable, net
|
|
|
666,252
|
|
|
555,191
|
|
Inventories
|
|
|
251,080
|
|
|
217,026
|
|
Other
current assets
|
|
|
60,436
|
|
|
58,614
|
|
Assets
held-for-sale
|
|
|
2,326
|
|
|
932
|
|
Total
current assets
|
|
|
1,101,023
|
|
|
925,856
|
|
Property,
plant and equipment, net
|
|
|
1,139,808
|
|
|
932,298
|
|
Goodwill,
net
|
|
|
559,629
|
|
|
433,125
|
|
Intangible
assets, net
|
|
|
78,839
|
|
|
10,837
|
|
Other
assets
|
|
|
96,505
|
|
|
87,640
|
|
Total
assets
|
|
$
|
2,975,804
|
|
$
|
2,389,756
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
97,963
|
|
$
|
16,145
|
|
Current
maturities of long-term debt
|
|
|
6,066
|
|
|
14,917
|
|
Accounts
payable
|
|
|
247,179
|
|
|
220,322
|
|
Accrued
compensation
|
|
|
75,742
|
|
|
63,776
|
|
Income
taxes payable
|
|
|
42,284
|
|
|
40,227
|
|
Dividends
payable
|
|
|
13,580
|
|
|
12,429
|
|
Insurance
liabilities
|
|
|
47,244
|
|
|
23,470
|
|
Other
current liabilities
|
|
|
218,345
|
|
|
187,111
|
|
Liabilities
associated with assets held-for-sale
|
|
|
—
|
|
|
691
|
|
Total
current liabilities
|
|
|
748,403
|
|
|
579,088
|
|
Long-term
debt
|
|
|
905,859
|
|
|
594,747
|
|
Deferred
income taxes
|
|
|
123,334
|
|
|
95,702
|
|
Insurance
liabilities
|
|
|
55,049
|
|
|
53,960
|
|
Retirement
plan liabilities
|
|
|
98,946
|
|
|
97,586
|
|
Other
liabilities
|
|
|
50,319
|
|
|
54,483
|
|
Total
liabilities
|
|
|
1,981,910
|
|
|
1,475,566
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, Series A junior participating cumulative preferred
stock
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $1.25, issued 68,257,785 and 67,911,031 shares as
of
December 31, 2005 and 2004, respectively
|
|
|
85,322
|
|
|
84,889
|
|
Additional
paid-in capital
|
|
|
154,017
|
|
|
139,532
|
|
Accumulated
other comprehensive loss
|
|
|
(167,318
|
)
|
|
(127,491
|
)
|
Retained
earnings
|
|
|
1,526,216
|
|
|
1,420,637
|
|
Treasury
stock, at cost (26,474,609 and 26,479,782 shares,
respectively)
|
|
|
(603,225
|
)
|
|
(603,377
|
)
|
Unearned
stock-based compensation
|
|
|
(1,118
|
)
|
|
-
|
|
Total
stockholders’ equity
|
|
|
993,894
|
|
|
914,190
|
|
Total
liabilities and stockholders’
equity
|
|
$
|
2,975,804
|
|
$
|
2,389,756
|
|
(a)
|
Reclassified
for comparative purposes.
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
Years
ended December 31
|
|
2005
|
|
2004
|
|
2003
|
|
Revenues
from continuing operations:
|
|
|
|
|
|
|
|
Service
sales
|
|
$
|
1,928,539
|
|
$
|
1,764,159
|
|
$
|
1,493,942
|
|
Product
sales
|
|
|
837,671
|
|
|
737,900
|
|
|
624,574
|
|
Total
revenues
|
|
|
2,766,210
|
|
|
2,502,059
|
|
|
2,118,516
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Cost
of services sold
|
|
|
1,425,222
|
|
|
1,313,075
|
|
|
1,104,873
|
|
Cost
of products sold
|
|
|
674,177
|
|
|
603,309
|
|
|
499,500
|
|
Selling,
general and administrative expenses
|
|
|
393,187
|
|
|
368,385
|
|
|
329,983
|
|
Research
and development expenses
|
|
|
2,676
|
|
|
2,579
|
|
|
3,313
|
|
Other
expenses
|
|
|
2,000
|
|
|
4,862
|
|
|
6,955
|
|
Total
costs and expenses
|
|
|
2,497,262
|
|
|
2,292,210
|
|
|
1,944,624
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
268,948
|
|
|
209,849
|
|
|
173,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
74
|
|
|
128
|
|
|
321
|
|
Interest
income
|
|
|
3,165
|
|
|
2,319
|
|
|
2,202
|
|
Interest
expense
|
|
|
(41,918
|
)
|
|
(41,057
|
)
|
|
(40,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes and minority
interest
|
|
|
230,269
|
|
|
171,239
|
|
|
135,902
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(64,771
|
)
|
|
(49,034
|
)
|
|
(41,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before minority
interest
|
|
|
165,498
|
|
|
122,205
|
|
|
94,194
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income
|
|
|
(8,748
|
)
|
|
(8,665
|
)
|
|
(7,195
|
)
|
Income
from continuing operations
|
|
|
156,750
|
|
|
113,540
|
|
|
86,999
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations of discontinued business
|
|
|
(430
|
)
|
|
(801
|
)
|
|
(668
|
)
|
Gain/(loss)
on disposal of discontinued business
|
|
|
261
|
|
|
(102
|
)
|
|
765
|
|
Income
related to discontinued defense business
|
|
|
20
|
|
|
12,849
|
|
|
8,030
|
|
Income
tax benefit (expense)
|
|
|
56
|
|
|
(4,275
|
)
|
|
(2,909
|
)
|
Income/(loss)
from discontinued operations
|
|
|
(93
|
)
|
|
7,671
|
|
|
5,218
|
|
Net
Income
|
|
$
|
156,657
|
|
$
|
121,211
|
|
$
|
92,217
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding
|
|
|
41,642
|
|
|
41,129
|
|
|
40,690
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
3.76
|
|
$
|
2.76
|
|
$
|
2.14
|
|
Discontinued
operations
|
|
|
|
|
|
0.19
|
|
|
0.13
|
|
Basic
earnings per common share
|
|
$
|
3.76
|
|
$
|
2.95
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
average shares of common stock outstanding
|
|
|
42,080
|
|
|
41,598
|
|
|
40,973
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
3.73
|
|
$
|
2.73
|
|
$
|
2.12
|
|
Discontinued
operations
|
|
|
—
|
|
|
0.18
|
|
|
0.13
|
|
Diluted
earnings per common share
|
|
$
|
3.72
(a
|
)
|
$
|
2.91
|
|
$
|
2.25
|
|
(a)
|
Does
not total due to rounding.
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
Years
ended December 31
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
156,657
|
|
$
|
121,211
|
|
$
|
92,217
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
|
cash
provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
195,139
|
|
|
181,914
|
|
|
167,161
|
|
Amortization
|
|
|
2,926
|
|
|
2,457
|
|
|
1,774
|
|
Equity
in income of unconsolidated entities, net
|
|
|
(74
|
)
|
|
(128
|
)
|
|
(321
|
)
|
Dividends
or distributions from unconsolidated entities
|
|
|
170
|
|
|
589
|
|
|
1,383
|
|
Other,
net
|
|
|
8,134
|
|
|
(2,781
|
)
|
|
(2,678
|
)
|
Changes
in assets and liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
|
|
and
dispositions of businesses:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(64,580
|
)
|
|
(81,403
|
)
|
|
(21,211
|
)
|
Inventories
|
|
|
(25,908
|
)
|
|
(22,278
|
)
|
|
(2,078
|
)
|
Accounts
payable
|
|
|
10,787
|
|
|
22,310
|
|
|
5,834
|
|
Net
receipts (disbursements) related to discontinued defense
business
|
|
|
(141
|
)
|
|
12,280
|
|
|
(1,328
|
)
|
Other
assets and liabilities
|
|
|
32,169
|
|
|
36,294
|
|
|
22,035
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
315,279
|
|
|
270,465
|
|
|
262,788
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(290,239
|
)
|
|
(204,235
|
)
|
|
(143,824
|
)
|
Purchase
of businesses, net of cash acquired*
|
|
|
(394,493
|
)
|
|
(12,264
|
)
|
|
(23,718
|
)
|
Proceeds
from sales of assets
|
|
|
39,543
|
|
|
6,897
|
|
|
22,794
|
|
Other
investing activities
|
|
|
4
|
|
|
-
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(645,185
|
)
|
|
(209,602
|
)
|
|
(144,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings, net (including reclassifications to/from long-term
debt)
|
|
|
73,530
|
|
|
(5,863
|
)
|
|
(20,013
|
)
|
Current
maturities and long-term debt:
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
571,928
|
|
|
198,032
|
|
|
323,366
|
|
Reductions
(including reclassifications to short-term borrowings)
|
|
|
(230,010
|
)
|
|
(214,551
|
)
|
|
(389,599
|
)
|
Cash
dividends paid on common stock
|
|
|
(49,928
|
)
|
|
(45,170
|
)
|
|
(42,688
|
)
|
Common
stock issued-options
|
|
|
9,097
|
|
|
16,656
|
|
|
8,758
|
|
Other
financing activities
|
|
|
(5,292
|
)
|
|
(5,616
|
)
|
|
(5,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by financing activities
|
|
|
369,325
|
|
|
(56,512
|
)
|
|
(125,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(12,583
|
)
|
|
9,532
|
|
|
17,582
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
26,836
|
|
|
13,883
|
|
|
10,078
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
94,093
|
|
|
80,210
|
|
|
70,132
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
120,929
|
|
$
|
94,093
|
|
$
|
80,210
|
|
|
|
|
|
|
|
|
|
|
|
|
*Purchase
of businesses, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
Working
capital, other than cash
|
|
$
|
(26,832
|
)
|
$
|
(60
|
)
|
$
|
(225
|
)
|
Property,
plant and equipment
|
|
|
(169,172
|
)
|
|
(3,024
|
)
|
|
(16,694
|
)
|
Other
noncurrent assets and liabilities, net
|
|
|
(198,490
|
)
|
|
(9,180
|
)
|
|
(6,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used to acquire businesses
|
|
$
|
(394,494
|
)
|
$
|
(12,264
|
)
|
$
|
(23,718
|
)
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’
EQUITY
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
Issued
|
|
Treasury
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Unearned
Stock-Based Compensation
|
|
Total
|
|
Balances,
January 1, 2003
|
|
$
|
83,793
|
|
$
|
(603,769
|
)
|
$
|
110,639
|
|
$
|
1,296,855
|
|
$
|
(242,978
|
)
|
$
|
0
|
|
$
|
644,540
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
92,217
|
|
|
|
|
|
|
|
|
92,217
|
|
Cash
dividends declared, $1.0625 per share
|
|
|
|
|
|
|
|
|
|
|
|
(43,285
|
)
|
|
|
|
|
|
|
|
(43,285
|
)
|
Translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,032
|
|
|
|
|
|
72,032
|
|
Cash
flow hedging instrument adjustments, net of $4 deferred income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
(8
|
)
|
Pension
liability adjustments, net of $(482) deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523
|
|
|
|
|
|
1,523
|
|
Marketable
securities adjustments, net of $(2) deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
4
|
|
Stock
options exercised, 325,480 shares
|
|
|
404
|
|
|
69
|
|
|
9,436
|
|
|
|
|
|
|
|
|
|
|
|
9,909
|
|
Other,
1,590 shares
|
|
|
|
|
|
61
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
56
|
|
Balances,
December 31, 2003
|
|
$
|
84,197
|
|
$
|
(603,639
|
)
|
$
|
120,070
|
|
$
|
1,345,787
|
|
$
|
(169,427
|
)
|
$
|
0
|
|
$
|
776,988
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
121,211
|
|
|
|
|
|
|
|
|
121,211
|
|
Cash
dividends declared, $1.125 per share
|
|
|
|
|
|
|
|
|
|
|
|
(46,361
|
)
|
|
|
|
|
|
|
|
(46,361
|
)
|
Translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,230
|
|
|
|
|
|
46,230
|
|
Cash
flow hedging instrument adjustments, net of $(86) deferred income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
159
|
|
Pension
liability adjustments, net of $2,062 deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,453
|
)
|
|
|
|
|
(4,453
|
)
|
Stock
options exercised, 564,529 shares
|
|
|
692
|
|
|
253
|
|
|
19,308
|
|
|
|
|
|
|
|
|
|
|
|
20,253
|
|
Other,
250 shares, and 3,500 restricted stock units
|
|
|
|
|
|
9
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
163
|
|
Balances,
December 31, 2004
|
|
$
|
84,889
|
|
$
|
(603,377
|
)
|
$
|
139,532
|
|
$
|
1,420,637
|
|
$
|
(127,491
|
)
|
$
|
0
|
|
$
|
914,190
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
156,657
|
|
|
|
|
|
|
|
|
156,657
|
|
Cash
dividends declared, $1.225 per share
|
|
|
|
|
|
|
|
|
|
|
|
(51,078
|
)
|
|
|
|
|
|
|
|
(51,078
|
)
|
Translation
adjustments, net of $2,846 deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,399
|
)
|
|
|
|
|
(54,399
|
)
|
Cash
flow hedging instrument adjustments, net of $82 deferred income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152
|
)
|
|
|
|
|
(152
|
)
|
Pension
liability adjustments, net of $(6,407) deferred income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,724
|
|
|
|
|
|
14,724
|
|
Stock
options exercised, 350,840 shares
|
|
|
433
|
|
|
116
|
|
|
12,596
|
|
|
|
|
|
|
|
|
|
|
|
13,145
|
|
Other,
1,087 shares, and 36,250 restricted stock units (net of
forfeitures)
|
|
|
|
|
|
36
|
|
|
1,889
|
|
|
|
|
|
|
|
|
(1,847
|
)
|
|
78
|
|
Amortization
of unearned compensation on restricted stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729
|
|
|
729
|
|
Balances,
December 31, 2005
|
|
$
|
85,322
|
|
$
|
(603,225
|
)
|
$
|
154,017
|
|
$
|
1,526,216
|
|
$
|
(167,318
|
)
|
$
|
(1,118
|
)
|
$
|
993,894
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
thousands)
Years
ended December 31
|
|
2005
|
|
2004
|
|
2003
|
|
Net
Income
|
|
$
|
156,657
|
|
$
|
121,211
|
|
$
|
92,217
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(54,399
|
)
|
|
46,230
|
|
|
72,032
|
|
Net
gains (losses) on cash flow hedging instruments, net of deferred
income
taxes of $79, $(30) and $6 in 2005, 2004 and 2003,
respectively
|
|
|
(147
|
)
|
|
55
|
|
|
(11
|
)
|
Reclassification
adjustment for loss on cash flow hedging instruments, net of deferred
income taxes of $3, $(56), and $(2) in 2005, 2004 and 2003,
respectively
|
|
|
(5
|
)
|
|
104
|
|
|
3
|
|
Pension
liability adjustments, net of deferred income taxes of $(6,407),
$2,062
and $(482) in 2005, 2004 and 2003, respectively
|
|
|
14,724
|
|
|
(4,453
|
)
|
|
1,523
|
|
Unrealized
gain on marketable securities, net of deferred income taxes of $(1)
in
2003
|
|
|
—
|
|
|
|
|
|
2
|
|
Reclassification
adjustment for loss on marketable securities included in net income,
net
of deferred income taxes of $(1) in 2003
|
|
|
|
|
|
|
|
|
2
|
|
Other
comprehensive income (loss)
|
|
|
(39,827
|
)
|
|
41,936
|
|
|
73,551
|
|
Total
comprehensive income
|
|
$
|
116,830
|
|
$
|
163,147
|
|
$
|
165,768
|
|
See
accompanying notes to consolidated financial statements.
HARSCO
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary
of Significant Accounting Policies
Consolidation
The
consolidated financial statements include the accounts of Harsco Corporation
and
its majority-owned subsidiaries (the "Company"). Additionally, the Company
consolidates three entities in which it has an equity interest of 49% to
50% and
exercises management control. These three entities had combined revenues
of
approximately $85.4 million or 3.1% of the Company’s total revenues in 2005.
Investments in unconsolidated entities (all of which are 40-50% owned) are
accounted for under the equity method. The Company does not have any off-balance
sheet arrangements with unconsolidated special-purpose entities.
Reclassifications
Certain
reclassifications have been made to prior years’ amounts to conform with current
year classifications. These reclassifications relate principally to segment
information, which has been reclassified to conform to the current presentation
as described in Note 14, “Segment Information.” Additional reclassifications
have been made to the components of the Consolidated Balance
Sheets.
As
a
result of these reclassifications, certain 2004 and 2003 amounts presented
for
comparative purposes will not individually agree with previously filed Forms
10-K or 10-Q.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash on hand, demand deposits and short-term
investments which are highly liquid in nature and have an original maturity
of
three months or less.
Inventories
Inventories
are stated at the lower of cost or market. Inventories in the United States
are
accounted for using principally the last-in, first-out (LIFO) method. Other
inventories are accounted for using the first-in, first-out (FIFO) or average
cost methods.
Depreciation
Property,
plant and equipment is recorded at cost and depreciated over the estimated
useful lives of the assets using principally the straight-line method. When
property is retired from service, the cost of the retirement is charged to
the
allowance for depreciation to the extent of the accumulated depreciation
and the
balance is charged to income. Long-lived assets to be disposed of by sale
are
not depreciated while they are held for sale.
Leases
The
Company leases certain property and equipment under noncancelable lease
agreements. All lease agreements are evaluated and classified as either an
operating lease or capital lease. A lease is classified as a capital lease
if
any of the following criteria are met: transfer of ownership to the Company
by
the end of the lease term; the lease contains a bargain purchase option;
the
lease term is equal to or greater than 75% of the asset’s economic life; or the
present value of future minimum lease payments is equal to or greater than
90%
of the asset’s fair market value. Operating lease expense is recognized ratably
over the entire lease term, including rent abatement periods and rent holidays.
Goodwill
and Other Intangible Assets
Goodwill
is not amortized but tested for impairment at the reporting unit level. SFAS
No.
142, “Goodwill and Other Intangible Assets,” (SFAS 142) defines a reporting unit
as an operating segment or one level below an operating segment (referred
to as
a component). A component of an operating segment is a reporting unit if
the
component constitutes a business for which discrete financial information
is
available and segment management regularly reviews the operating results
of that
component. Accordingly, the Company performs the goodwill impairment test
at the
operating segment level for the Mill Services Segment, the Access Services
Segment and the Engineered Products and Services category and at the component
level for the Gas Technologies Segment. The goodwill impairment tests are
performed on an annual basis as of October 1 and between annual tests whenever
events or circumstances indicate that the carrying value of a reporting unit’s
goodwill may exceed its fair value. A discounted cash flow model is used
to
estimate the fair value of a reporting unit. This model requires the use
of
long-term planning forecasts and assumptions regarding industry-specific
economic conditions that are outside the control of the Company. See Note
5,
“Goodwill and Other Intangible Assets,” for additional information on intangible
assets and goodwill impairment testing. Finite-lived intangible assets are
amortized on a straight-line basis over their estimated useful
lives.
Impairment
of Long-Lived Assets (Other than Goodwill)
Long-lived
assets are reviewed for impairment when events and circumstances indicate
that
the carrying amount of an asset may not be recoverable. The Company's policy
is
to record an impairment loss when it is determined that the carrying amount
of
the asset exceeds the sum of the expected undiscounted future cash flows
resulting from use of the asset and its eventual disposition. Impairment
losses
are measured as the amount by which the carrying amount of the asset exceeds
its
fair value. Long-lived assets to be disposed of are reported at the lower
of the
carrying amount or fair value less cost to sell.
Revenue
Recognition
Product
sales and service sales are recognized when they are realized or realizable
and
when earned. Revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the Company’s price to the
buyer is fixed or determinable and collectibility is reasonably assured.
Service
sales include sales of the Mill Services and Access Services Segments as
well as
railway track maintenance services. Product sales include sales of the Gas
Technologies Segment as well as the manufacturing businesses of the Engineered
Products and Services (“all other”) Category. Rentals were less than 10% of
total revenues in 2005, 2004 and 2003 and are included in service
sales.
Mill
Services Segment
- This
Segment provides services predominantly on a long-term, volume-of-production
contract basis. Contracts may include both fixed monthly fees as well as
variable fees based upon specific services provided to the customer. The
fixed-fee portion is recognized periodically as earned (normally monthly)
over
the contractual period. The variable-fee portion is recognized as services
are
performed and differs from period-to-period based upon the actual provision
of
services.
Access
Services Segment
- This
Segment rents equipment under month-to-month rental contracts, provides services
under both fixed-fee and time-and-materials short-term contracts and, to
a
lesser extent, sells products to customers. Equipment rentals are recognized
as
earned over the contractual rental period. Services provided on a fixed-fee
basis are recognized over the contractual period based upon the completion
of
specific units of accounting (i.e., erection and dismantling of equipment).
Services provided on a time-and-materials basis are recognized when earned
as
services are performed. Product sales revenue is recognized when title and
risk
of loss transfer, and when all of the revenue recognition criteria have been
met.
Gas
Technologies Segment
- This
Segment sells products under customer-specific sales contracts. Product sales
revenue is recognized when title and risk of loss transfer, and when all
of the
revenue recognition criteria detailed in SAB 104 have been met. Title and
risk
of loss for domestic shipments generally transfers to the customer at the
point
of shipment. For international sales, title and risk of loss transfer in
accordance with the international commercial terms included in the specific
customer contract.
Engineered
Products and Services (“all other”) Category
- This
category includes the Harsco Track Technologies, Reed Minerals, IKG Industries,
Patterson-Kelley and Air-X-Changers operating segments. These operating segments
principally sell products. The Harsco Track Technologies Division sells products
and provides services. Product sales revenue for each of these operating
segments is recognized generally when title and risk of loss transfer, and
when
all of the revenue recognition criteria have been met. Title and risk of
loss
for domestic shipments generally transfers to the customer at the point of
shipment. For export sales, title and risk of loss transfer in accordance
with
the international commercial terms included in the specific customer contract.
Revenue may be recognized subsequent to the transfer of title and risk of
loss
for certain product sales of the Harsco Track Technologies Division if the
specific sales contract includes a customer acceptance clause which provides
for
different timing. In those situations revenue is recognized after transfer
of
title and risk of loss and after customer acceptance. The Harsco Track
Technologies Division provides services predominantly on a long-term,
time-and-materials contract basis. Revenue is recognized when earned as services
are performed.
Income
Taxes
United
States federal and state income taxes and non-U.S. income taxes are provided
currently on the undistributed earnings of international subsidiaries and
unconsolidated affiliated entities, giving recognition to current tax rates
and
applicable foreign tax credits, except when management has specific plans
for
reinvestment of undistributed earnings which will result in the indefinite
postponement of their remittance. Deferred taxes are provided using the asset
and liability method for temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax
bases. A valuation allowance to reduce deferred tax assets is evaluated on
a
quarterly basis. The valuation allowance is principally for tax loss
carryforwards which are uncertain as to realizability. Income tax loss
contingencies are recorded in the period when it is determined that it is
probable that a liability has been incurred and the loss can be reasonably
estimated. Adjustments to estimated amounts are recorded as necessary based
upon
new information, the occurrence of new events or the resolution of an
uncertainty.
Accrued
Insurance and Loss Reserves
The
Company retains a significant portion of the risk for workers’ compensation,
U.K. employers’ liability, automobile, general and product liability losses.
During 2005, 2004 and 2003, the Company recorded insurance expense related
to
these lines of coverage of approximately $37 million, $37 million and $36
million, respectively. Reserves have been recorded which reflect the
undiscounted estimated liabilities including claims incurred but not reported.
When a recognized liability is covered by third-party insurance, the Company
records an insurance claim receivable to reflect the covered liability. Changes
in the estimates of the reserves are included in net income in the period
determined. During 2005, 2004 and 2003, the Company recorded retrospective
insurance reserve adjustments that decreased pre-tax insurance expense for
self-insured programs by $4.1 million, $2.7 million and $5.7 million,
respectively. At December 31, 2005 and 2004, the Company has recorded
liabilities of $102.3 million and $77.4 million, respectively, related to
both
asserted as well as unasserted insurance claims. Included in the balance
at
December 31, 2005 were $25.2 million of recognized liabilities covered by
insurance carriers. Amounts estimated to be paid within one year have been
classified as current Insurance liabilities, with the remainder included
in
non-current Insurance liabilities.
Warranties
The
Company has recorded product warranty reserves of $5.0 million, $4.2 million
and
$2.8 million as of December 31, 2005, 2004 and 2003, respectively. The Company
provides for warranties of certain products as they are sold in accordance
with
SFAS No. 5, “Accounting for Contingencies.” The following table summarizes the
warranty activity for the years ended December 31, 2005, 2004 and
2003:
Warranty
Activity
|
|
|
|
|
|
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$
|
4,161
|
|
$
|
2,788
|
|
$
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
for warranties issued during the period
|
|
|
3,851
|
|
|
4,135
|
(a)
|
|
2,125
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(reductions)
related to pre-existing warranties
|
|
|
60
|
|
|
(414
|
)
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Warranties
paid
|
|
|
(3,083
|
)
|
|
(2,361
|
)
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
(principally foreign currency translation)
|
|
|
(27
|
)
|
|
13
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of the period
|
|
$
|
4,962
|
|
$
|
4,161
|
|
$
|
2,788
|
|
(a) The
increase from 2003 reflects changes in product mix and increased
sales.
Foreign
Currency Translation
The
financial statements of the Company's subsidiaries outside the United States,
except for those subsidiaries located in highly inflationary economies and
those
entities for which the U.S. dollar is the currency of the primary economic
environment in which the entity operates, are measured using the local currency
as the functional currency. Assets and liabilities of these subsidiaries
are
translated at the exchange rates as of the balance sheet date. Resulting
translation adjustments are recorded in the cumulative translation adjustment
account, a separate component of Other comprehensive income (loss). Income
and
expense items are translated at average monthly exchange rates. Gains and
losses
from foreign currency transactions are included in net income. For subsidiaries
operating in highly inflationary economies, and those entities for which
the
U.S. dollar is the currency of the primary economic environment in which
the
entity operates, gains and losses on foreign currency transactions and balance
sheet translation adjustments are included in net income.
Financial
Instruments and Hedging
The
Company has operations throughout the world that are exposed to fluctuations
in
related foreign currencies in the normal course of business. The Company
seeks
to reduce exposure to foreign currency fluctuations through the use of forward
exchange contracts. The Company does not hold or issue financial instruments
for
trading purposes, and it is the Company's policy to prohibit the use of
derivatives for speculative purposes. The Company has a Foreign Currency
Risk
Management Committee that meets periodically to monitor foreign currency
risks.
The
Company executes foreign currency forward exchange contracts to hedge
transactions for firm purchase commitments, to hedge variable cash flows
of
forecasted transactions and for export sales denominated in foreign currencies.
These contracts are generally for 90 days or less. For those contracts that
are
designated as qualified cash
flow
hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (SFAS 133), gains or losses are recorded in Other comprehensive
income (loss).
Amounts
recorded in Other comprehensive income (loss) are reclassified into income
in
the same period or periods during which the hedged forecasted transaction
affects income. The cash flows from these contracts are classified consistent
with the cash flows from the transaction being hedged (e.g., the cash flows
related to contracts to hedge the purchase of fixed assets are included in
cash
flows from investing activities, etc.). The Company also enters into certain
forward exchange contracts not designated as hedges under SFAS 133. Gains
and
losses on these contracts are recognized in income based on fair market value.
For fair value hedges of a firm commitment, the gain or loss on the derivative
and the offsetting gain or loss on the hedged firm commitment are recognized
currently in income.
Options
for Common Stock
In
prior
years, when stock options were issued to employees, the Company used the
intrinsic value method to account for the options. No compensation expense
was
recognized on the grant date, since at that date, the option price equaled
the
market price of the underlying common stock. Effective in 2003, the Company
ceased granting stock options to employees.
The
Company's net income and net income per common share would have been reduced
to
the pro forma amounts indicated below if compensation cost for the Company's
stock option plan had been determined based on the fair value at the grant
date
for awards in accordance with the provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation” (SFAS 123).
Pro
forma Impact of SFAS 123 on Earnings
|
|
(In
thousands, except per share)
|
|
2005
|
|
2004
|
|
2003
|
|
Net
income:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
156,657
|
|
$
|
121,211
|
|
$
|
92,217
|
|
Compensation
expense (a)
|
|
|
—
|
|
|
(96
|
)
|
|
(1,673
|
)
|
Pro
forma
|
|
$
|
156,657
|
|
$
|
121,115
|
|
$
|
90,544
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
3.76
|
|
$
|
2.95
|
|
$
|
2.27
|
|
Pro
forma
|
|
|
3.76
|
|
|
2.94
|
|
|
2.23
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
3.72
|
|
|
2.91
|
|
|
2.25
|
|
Pro
forma
|
|
|
3.72
|
|
|
2.91
|
|
|
2.21
|
|
(a) |
Total
stock-based employee compensation expense related to stock options
determined under fair value-based method for all awards, net
of related
income tax effects.
|
In
2004,
the Management Development and Compensation Committee of the Board of Directors
approved the granting of performance-based restricted stock units as the
long-term equity component of officer compensation. See Note 12, “Stock-Based
Compensation,” for additional information on the Company’s equity compensation
plans.
Earnings
Per Share
Basic
earnings per share are calculated using the average shares of common stock
outstanding, while diluted earnings per share reflect the dilutive effects
of
restricted stock units and the potential dilution that could occur if stock
options were exercised. See Note 11, “Capital Stock,” for additional information
on earnings per share.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements,
and
the reported amounts of revenues and expenses. Actual results could differ
from
those estimates.
New
Financial Accounting Standards Issued
SFAS
No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R)
In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123R
which replaced SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock Issued to Employees” (APB 25). SFAS 123R requires the cost of employee
services received in exchange for an award of equity instruments to be based
upon the grant-date fair value of the award (with limited
exceptions).
Additionally, this cost is to be recognized as expense over the period during
which an employee is required to provide services in exchange for the award
(usually the vesting period). SFAS 123R eliminates APB 25’s intrinsic value
method which the Company has historically used to account for stock option
grants.
In
March
2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) which summarizes the views of the SEC staff regarding
the interaction between SFAS 123R and certain SEC rules and regulations.
SAB 107
provides guidance on several topics including: valuation methods, the
classification of compensation expense, capitalization of compensation cost
related to share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements, and disclosures in Management’s
Discussion and Analysis subsequent to adoption of SFAS 123R.
In
April
2005, the SEC issued FR-74, “Amendment to Rule 4-01(a) of Regulation S-X
Regarding the Compliance Date for Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based
Payment”
(FR-74). FR-74 allows companies to implement SFAS 123R at the beginning of
their
next fiscal year (January 1, 2006 for the Company), instead of the next
reporting period that begins after June 15, 2005. FR-74 does not change the
accounting required by SFAS 123R; it only changes the required implementation
date of the standard.
The
Company implemented SFAS 123R as of January 1, 2006, and it did not have
a
material affect on the Company’s financial position, results of operations or
cash flows.
SFAS
No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (SFAS
151)
In
November 2004, the FASB issued SFAS 151, which amends Accounting Research
Bulletin No. 43, Chapter 4, “Inventory Pricing” (ARB 43). SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage) should be expensed rather than capitalized as
inventory. Additionally, SFAS 151 requires that allocation of fixed production
overheads to inventory costs be based upon the normal capacity of the production
facility. The provisions of SFAS 151 are applicable to inventory costs incurred
during fiscal years beginning after June 15, 2005 (as of January 1, 2006
for the
Company) with earlier application permitted. The Company implemented SFAS
151
effective January 1, 2006, and it did not have a material impact on the
Company’s financial position, results of operations or cash flows.
SFAS
No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3” (SFAS 154)
In
May
2005, the FASB issued SFAS 154 which replaces APB Opinion No. 20, “Accounting
Changes” (APB 20) and SFAS No. 3, “Reporting Accounting Changes in Interim
Financial Statements” (SFAS 3). SFAS 154 changes the requirements for the
accounting and reporting of a change in accounting principle or correction
of an
error. It establishes, unless impracticable, retrospective application as
the
required method for reporting a change in accounting principle in the absence
of
explicit transition requirements specific to the newly adopted accounting
principle. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company
implemented SFAS 154 effective January 1, 2006, and it did not have a material
impact on the Company’s financial position, results of operations or cash flows.
FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (FIN 47).
In
March
2005, the FASB issued FIN 47 which clarifies that the term “conditional asset
retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement
Obligations” (SFAS 143), refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. The
obligation to perform the asset retirement activity is unconditional even
though
uncertainty exists about the timing and/or method of settlement. Accordingly,
an
entity is required to recognize a liability for the fair value of a conditional
asset retirement obligation if the fair value of the liability can be reasonably
estimated. The fair value of a liability for the conditional asset retirement
obligation should be recognized when incurred—generally upon acquisition,
construction, or development and/or through the normal operation of the asset.
Uncertainty about the timing and/or method of settlement of a conditional
asset
retirement obligation should be factored into the measurement of the liability
when sufficient information exists.
FIN 47
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The Company
implemented FIN 47 as of December 31, 2005, and it did not have a material
impact on the Company’s financial position, results of operations or cash
flows.
SFAS
No. 155, “Accounting
for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133
and 140” (SFAS 155).
In
February 2006, the FASB issued SFAS 155, which amends SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.” SFAS 155 addresses several issues relating to the accounting
for financial instruments, including permitting fair value measurement for
any
hybrid financial instrument that contains an embedded derivative, and
eliminating the prohibition on a qualifying special-purpose entity from holding
certain derivative instruments. SFAS 155 also provides clarification that
concentrations of credit risk in the form of subordination are not embedded
derivatives. SFAS 155 is effective for all financial instruments issued or
acquired after the fiscal year that begins after September 15, 2006 (January
1,
2007 for the Company), with early application permitted. The Company has
not yet
determined the timing of adoption or the full impact of SFAS 155; however,
it is
not expected to materially impact the Company’s financial position, results of
operations or cash flows.
2. Acquisitions
and Dispositions
Acquisitions
In
December 2005, the Company acquired the Northern Hemisphere steel mill services
operations of Brambles Industrial Services (BISNH), a unit of the Sydney,
Australia-based Brambles Industrial Limited, for ₤137 million (approximately
$236 million), excluding acquisition costs. BISNH will be included in the
Company’s Mill Services Segment. The Company did not assume debt as part of this
acquisition. BISNH is a provider of on-site, outsourced mill services to
the
steel and metals industries, operating at 19 locations in the U.K., France,
Holland and the United States. Goodwill recognized in this transaction was
$93.1
million, of which $88.5 million is expected to be deductible for U. S. income
tax purposes. Because this acquisition occurred near the end of the year,
the
purchase price allocations and goodwill balance have not been finalized as
of
December 31, 2005. All regulatory filings, reviews and approvals have now
been
completed with respect to this transaction.
In
November 2005, the Company acquired the Germany-based Hünnebeck Group GmbH
(Hünnebeck) for €140 million (approximately $164 million), which included the
assumption of debt but excludes acquisition costs. Hünnebeck will be included in
the Company’s Access Services Segment. Hünnebeck is a provider of highly
engineered formwork and scaffolding equipment with more than 60 branches
and
depots in 12 countries and export sales worldwide. Goodwill recognized in
this
transaction was $71.2 million, none of which is expected to be deductible
for U.
S. income tax purposes. Because this acquisition occurred near the end of
the
year, the purchase price allocations and goodwill balance have not been
finalized as of December 31, 2005.
In
May
2005, the Company’s Mill Services Segment acquired Evulca SAS, a France-based
company with more than 30 years experience providing conveyor belt management
and maintenance services to the steel industry and other industrial clients.
The
privately-held company recorded 2004 sales in excess of $5 million.
In
October 2004, the Company’s Access Services Segment acquired full ownership of
its existing Mastclimbers Ltd joint venture partnership which is located
in the
United Kingdom. Previously, the Company owned 51% of the partnership.
Mastclimbers Ltd ranks as the United Kingdom’s leading supplier of mast climbing
work platforms and related services.
In
April
2004, the Company’s Access Services Segment acquired the Australian distributor,
Raffia Contracting Pty, and Raffia’s sister company, Tower International Pty.
Both businesses are based in Sydney, New South Wales. Raffia Contracting
Pty is
involved in the supply and erection of scaffolding, working with many of
the
major contractors in and around the state capital, while Tower International
Pty
provides light access sales and rentals throughout the area. The combined
businesses have been renamed SGB Raffia.
Dispositions
- Assets Held for Sale and Discontinued Operations
In
management’s ongoing strategic efforts to increase the Company’s focus on core
industrial services, certain manufacturing operations have been divested.
In
October 2005, certain assets and liabilities related to the Company’s Youngman
light access manufacturing plant in the U.K. (a component of the Access Services
Segment) were sold. The Youngman operations consisted of a single manufacturing
facility, with external sales of approximately $60 million in 2004. At the
time
of sale, the net book value of its assets and liabilities was $34.5 million
and
$15.9 million, respectively.
Effective
March 21, 2002, the Board of Directors authorized the sale of the Capitol
Manufacturing business, a business unit of the Gas Technologies Segment.
A
significant portion of the Capitol Manufacturing business was sold on June
28,
2002. The Company continued to recognize income from inventory consigned
to the
buyer in accordance with the sale agreement and when all revenue recognition
criteria were met. As of June 30, 2005, all the remaining inventory had been
sold
and
the corresponding income was recognized in Discontinued operations. The
income from the sale of this inventory had an immaterial effect on net income
for the twelve months ended December 31, 2005.
Throughout
2004 and 2005, management approved the sale of certain long-lived assets
(primarily land and buildings) of the Gas Technologies Segment, the Mill
Services Segment and the Engineered Products and Services Category.
The
major
classes of assets and liabilities “held-for-sale” included in the Consolidated
Balance Sheets are as follows:
(In
thousands)
As
of December 31
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
—
|
|
$
|
15
|
|
Inventories
|
|
|
—
|
|
|
133
|
|
Other
current assets
|
|
|
|
|
|
23
|
|
Property,
plant and equipment, net
|
|
|
2,326
|
|
|
761
|
|
Total
assets “held-for-sale”
|
|
$
|
2,326
|
|
$
|
932
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
|
|
$
|
24
|
|
Other
current liabilities
|
|
|
|
|
|
542
|
|
Other
liabilities
|
|
|
|
|
|
125
|
|
Total
liabilities associated with assets
“held-for-sale”
|
|
$
|
|
|
$
|
691
|
|
3. Accounts
Receivable and Inventories
At
December 31, 2005 and 2004, accounts receivable of $666.3 million and $555.2
million, respectively, were net of allowances for doubtful accounts of $24.4
million and $19.1 million, respectively. Gross accounts receivable included
trade accounts receivable of $638.5 million and $557.1 million at December
31,
2005 and 2004, respectively. The increase in accounts receivable and the
allowance for doubtful accounts from December 31, 2004 related principally
to
the net effect of acquisitions and divestitures discussed in Note 2,
“Acquisitions and Dispositions,” and an increase of $25.2 million in insurance
claims receivable, partially offset by the write-off of previously reserved
accounts receivable. The provision for doubtful accounts was $6.5 million,
$5.0
million and $3.4 million for 2005, 2004 and 2003, respectively.
Inventories
consist of the following:
|
|
Inventories
|
(In
thousands)
|
|
2005
|
|
2004
|
|
Finished
goods
|
|
$
|
85,325
|
|
$
|
60,554
|
|
Work-in-process
|
|
|
43,830
|
|
|
37,882
|
|
Raw
materials and purchased parts
|
|
|
87,251
|
|
|
91,965
|
|
Stores
and supplies
|
|
|
34,674
|
|
|
26,625
|
|
Total
inventories
|
|
$
|
251,080
|
|
$
|
217,026
|
|
Valued
at lower of cost or market:
|
|
|
|
|
|
|
|
Last-in,
first out (LIFO) basis
|
|
$
|
137,101
|
|
$
|
129,064
|
|
First-in,
first out (FIFO) basis
|
|
|
26,003
|
|
|
17,399
|
|
Average
cost basis
|
|
|
87,976
|
|
|
70,563
|
|
Total
inventories
|
|
$
|
251,080
|
|
$
|
217,026
|
|
The
increase in inventory balances related principally to inventories acquired
as
part of the Hünnebeck and BISNH acquisitions discussed in Note 2, “Acquisitions
and Dispositions.”
Inventories
valued on the LIFO basis at December 31, 2005 and 2004 were approximately
$34.1
million and $35.8 million, respectively, less than the amounts of such
inventories valued at current costs.
As
a
result of reducing certain inventory quantities valued on the LIFO basis,
net
income increased from that which would have been recorded under the FIFO
basis
of valuation by $1.6 million, $0.02 million and $1.1 million in 2005, 2004
and
2003, respectively.
4. Property,
Plant and Equipment
Property,
plant and equipment consists of the following:
(In
thousands)
|
|
2005
|
|
2004
|
|
Land
and improvements
|
|
$
|
39,306
|
|
$
|
39,838
|
|
Buildings
and improvements
|
|
|
168,727
|
|
|
185,807
|
|
Machinery
and equipment
|
|
|
2,291,294
|
|
|
2,027,765
|
|
Uncompleted
construction
|
|
|
91,186
|
|
|
45,083
|
|
Gross
property, plant and equipment
|
|
|
2,590,513
|
|
|
2,298,493
|
|
Less
accumulated depreciation
|
|
|
(1,450,705
|
)
|
|
(1,366,195
|
)
|
Net
property, plant and equipment
|
|
$
|
1,139,808
|
|
$
|
932,298
|
|
The
increase in net property, plant and equipment related principally to assets
acquired as part of the Hünnebeck and BISNH acquisitions discussed in Note 2,
“Acquisitions and Dispositions,” as well as increases for the railway track
services business.
The
estimated useful lives of different types of assets are generally:
|
Land improvements |
|
5 to 20 years |
|
|
Buildings and improvements |
|
10 to 40 years |
|
|
Certain
plant, buildings and installations
(Principally
Mill Services Segment)
|
|
3 to 10 years
|
|
|
Machinery
and equipment |
|
3 to 20 years
|
|
|
Leasehold improvements |
|
Estimated useful life of the improvement
or, if shorter, the life of the lease
|
|
5. Goodwill
and Other Intangible Assets
In
connection with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets,” (SFAS 142) goodwill and intangible assets with indefinite useful lives
are no longer amortized. Goodwill is tested for impairment at the reporting
unit
level on an annual basis, and between annual tests, whenever events or
circumstances indicate that the carrying value of a reporting unit’s goodwill
may exceed its fair value. This impairment testing is a two-step process
as
outlined in SFAS 142. Step one is a comparison of each reporting unit’s fair
value to its book value. If the fair value of the reporting unit exceeds
the
book value, step two of the test is not required. Step two requires the
allocation of fair values to assets and liabilities as if the reporting unit
had
just been purchased resulting in the implied fair value of goodwill. If the
carrying value of the goodwill exceeds the implied fair value, a write down
to
the implied fair value would be required.
The
Company uses a discounted cash flow model to estimate the fair value of a
reporting unit in performing step one of the testing. This model requires
the
use of long-term planning estimates and assumptions regarding industry-specific
economic conditions that are outside the control of the Company. The Company
performed required annual testing for goodwill impairment as of October 1,
2005
and 2004 and all reporting units of the Company passed the step one testing
thereby indicating that no goodwill impairment exists. However, there can
be no
assurance that future goodwill impairment tests will not result in a charge
to
earnings.
The
following table reflects the changes in carrying amounts of goodwill by segment
for the years ended December 31, 2004 and 2005:
Goodwill
by Segment
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Mill
Services
Segment
|
|
Access
Services
Segment
|
|
Gas
Technologies
Segment
|
|
Engineered
Products
and
Services
(“all
other”)
Category
|
|
Consolidated
Totals
|
|
Balance
as of December 31, 2003, net of accumulated amortization
|
|
$
|
211,318
|
|
$
|
151,698
|
|
$
|
36,693
|
|
$
|
8,137
|
|
$
|
407,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired during year
|
|
|
|
|
|
5,046
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(principally foreign currency translation)
|
|
|
9,175
|
|
|
11,058
|
|
|
|
|
|
|
|
|
20,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2004, net of accumulated amortization
|
|
$
|
220,493
|
|
$
|
167,802
|
|
$
|
36,693
|
|
$
|
8,137
|
|
$
|
433,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired during year
|
|
|
93,268
|
|
|
71,068
|
|
|
|
|
|
|
|
|
164,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
written off related to sale of business unit
|
|
|
|
|
|
(5,370
|
)
|
|
|
|
|
|
|
|
(5,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(principally foreign currency translation)
|
|
|
(16,542
|
)
|
|
(15,920
|
)
|
|
|
|
|
|
|
|
(32,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2005, net of accumulated
amortization
|
|
$
|
297,219
|
|
$
|
217,580
|
|
$
|
36,693
|
|
$
|
8,137
|
|
$
|
559,629
|
|
Goodwill
is net of accumulated amortization of $103.0 million and $108.4 million at
December 31, 2005 and 2004, respectively.
Intangible
assets, which are included principally in Other assets on the Consolidated
Balance Sheets, totaled $78.8 million, net of accumulated amortization of
$11.8
million at December 31, 2005 and $10.9 million, net of accumulated amortization
of $10.5 million at December 31, 2004. The following table reflects these
intangible assets by major category:
Intangible
Assets
|
|
|
|
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
73,224
|
|
$
|
1,262
|
|
$
|
7,662
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
5,036
|
|
|
4,402
|
|
|
4,898
|
|
|
4,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
4,426
|
|
|
3,587
|
|
|
4,416
|
|
|
3,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
7,962
|
|
|
2,558
|
|
|
4,411
|
|
|
2,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,648
|
|
$
|
11,809
|
|
$
|
21,387
|
|
$
|
10,485
|
|
The
increase in intangible assets for 2005 is due principally to the acquisitions
discussed in Note 2, “Acquisitions and Dispositions.” As part of these
transactions, the Company acquired the following intangible assets (by major
class) which are subject to amortization:
Acquired
Intangible Assets
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Gross
Carrying
Amount
|
|
Residual
Value
|
|
Weighted-average
amortization
period
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
67,789
|
|
|
None
|
|
|
18
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
147
|
|
|
None
|
|
|
10
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
586
|
|
|
None
|
|
|
10
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
4,104
|
|
|
None
|
|
|
11
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,626
|
|
|
|
|
|
|
|
There
were no research and development assets acquired and written off in 2005,
2004
or 2003.
Amortization
expense for intangible assets was $2.1 million, $1.8 million and $1.2 million
for the years ended December 31, 2005, 2004 and 2003, respectively. The
following table shows the estimated amortization expense for the next five
fiscal years based on current intangible assets.
(In
thousands)
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
amortization expense
|
|
$
|
6,335
|
|
$
|
6,076
|
|
$
|
5,766
|
|
$
|
5,488
|
|
$
|
5,302
|
|
6. Debt
and Credit Agreements
The
Company has various credit facilities and commercial paper programs available
for use throughout the world. The following table illustrates the amounts
outstanding on credit facilities and commercial paper programs and available
credit at December 31, 2005. The Company limits the aggregate commercial
paper,
syndicated credit facility and bilateral credit facility borrowings at any
one
time to a maximum of $600 million. These credit facilities and programs are
described in more detail below the table.
Summary
of Credit Facilities and Commercial Paper
Programs
|
|
As
of December 31, 2005
|
|
(In
thousands)
|
|
Facility
Limit
|
|
Outstanding
Balance
|
|
Available
Credit
|
|
|
|
|
|
|
|
|
|
U.S.
commercial paper program
|
|
$
|
400,000
|
|
$
|
351,317
|
|
$
|
48,683
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
commercial paper program
|
|
|
236,800
|
|
|
127,444
|
|
|
109,356
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility (a)
|
|
|
450,000
|
|
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
credit facility (a)
|
|
|
100,000
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bilateral
credit facility (b)
|
|
|
50,000
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
at December 31, 2005
|
|
$
|
1,236,800
|
|
$
|
478,761
|
|
$
|
758,039
|
(c)
|
(b)
|
International-based
program
|
(c)
|
Although
the Company has significant available credit, it is the Company’s policy
to limit aggregate commercial paper and credit facility borrowings
at any
one time to a maximum of $600 million.
|
The
Company has a U.S. commercial paper borrowing program under which it can
issue
up to $400 million of short-term notes in the U.S. commercial paper market.
In
addition, the Company has a 200 million euro commercial paper program,
equivalent
to approximately $236.8 million at December 31, 2005, which is used to fund
the
Company's international operations. Commercial paper interest rates, which
are
based on market conditions, have been lower than comparable rates available
under the credit facilities. At December 31, 2005 and 2004, the Company had
$351.3 million and $26.9 million of U.S. commercial paper outstanding,
respectively, and $127.4 million and $6.8 million outstanding, respectively,
under its European-based commercial paper program. Commercial paper is
classified as long-term debt when the Company has the ability and intent
to
refinance it on a long-term basis through existing long-term credit
facilities. At December 31, 2005, the Company classified $88.7 million of
commercial paper as short-term debt because it does not intend to carry this
amount beyond the next twelve months. The remaining $390.1 million in
commercial paper at December 31, 2005 was classified as long-term debt. At
December 31, 2004, all commercial paper was classified as long-term
debt.
On
November 8, 2005, the Company increased the maximum amount under its euro
commercial paper program from EUR 100 million to EUR 200 million, and on
December 21, 2005, the Company increased the maximum amount of its U.S.
commercial paper program from $350 million to $400 million. The increase
in
authorized commercial paper will provide increased financial flexibility
for
potential growth-related investments and for general corporate requirements.
On
November 23, 2005, the Company executed a new revolving credit facility in
the
amount of $450 million, through a syndicate of 16 banks, which matures in
November 2010. This facility serves as back-up to the Company's commercial
paper
programs. This new facility replaced the existing $350 million revolving
credit
facility that would have matured on August 12, 2007. Interest rates on the
new
facility are based upon the London Interbank Offered Rate (LIBOR) plus a
margin.
The Company pays a facility fee (.08% per annum as of December 31, 2005)
that
varies based upon its credit ratings. At December 31, 2005 and 2004, there
were
no borrowings outstanding under either of the facilities.
On
December 23, 2005, the Company executed a new supplemental 364-day credit
facility in the amount of $100 million, through two banks, which matures
in
December 2006. This facility also serves as back-up to the Company’s commercial
paper programs. Interest rates on the new facility are based upon either
the
announced Citicorp lending rate, the Federal Funds Effective Rate plus a
margin
or the London Interbank Offered Rate (LIBOR) plus a margin. The Company pays
a
facility fee (.08% per annum as of December 31, 2005) that varies based upon
its
credit ratings. As of December 31, 2005, there were no borrowings outstanding
on
this credit facility.
The
bilateral credit facility was renewed in December 2005 for an additional
one
year and the amount was increased from $25 million to $50 million. The facility
serves as back-up to the Company’s commercial paper programs and also provides
available financing for the Company’s European operations. Borrowings under this
facility, which expires in December 2006, are available in most major currencies
with active markets at interest rates based upon LIBOR plus a margin. Borrowings
outstanding at expiration may be repaid over the succeeding 12 months. As
of
December 31, 2005 and 2004, there were no borrowings outstanding under either
of
the facilities.
Short-term
debt amounted to $98.0 million (of which $88.7 million was commercial paper)
and
$16.1 million at December 31, 2005 and 2004, respectively. Other than the
commercial paper borrowings, short-term debt was principally bank overdrafts.
The weighted-average interest rate for short-term borrowings at December
31,
2005 and 2004 was 4.0% and 3.4%, respectively.
Long-term
debt consists of the following:
|
|
Long-term
Debt
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
7.25%
British pound sterling-denominated notes due October 27,
2010
|
|
$
|
341,063
|
|
$
|
379,751
|
|
5.125%
notes due September 15, 2013
|
|
|
148,856
|
|
|
148,738
|
|
Commercial
paper borrowings, with a weighted average interest rate of 3.9%
and 2.3%
as of December 31, 2005 and 2004, respectively
|
|
|
390,074
|
|
|
33,665
|
|
Faber
Prest loan notes due October 31, 2008 with interest based on sterling
LIBOR minus .75% (3.9% and 4.2% at December 31, 2005 and 2004,
respectively)
|
|
|
6,731
|
|
|
9,361
|
|
Industrial
development bonds, payable in varying amounts from 2010 to 2011
with a
weighted average interest rate of 3.7% and 2.1% as of December
31, 2005
and 2004, respectively
|
|
|
6,500
|
|
|
6,500
|
|
Other
financing payable in varying amounts to 2011 with a weighted average
interest rate of 5.5% and 6.0% as of December 31, 2005 and 2004,
respectively
|
|
|
18,701
|
|
|
31,649
|
|
|
|
|
911,925
|
|
|
609,664
|
|
Less:
current maturities
|
|
|
(6,066
|
)
|
|
(14,917
|
)
|
|
|
$
|
905,859
|
|
$
|
594,747
|
|
The
Company’s credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt
to
capital ratio of 60%. Additionally, the Company’s 7.25% British pound
sterling-denominated notes due October 27, 2010 include a covenant that permits
the note holders to redeem their notes, at par, in the event of a change
of
control of the Company. At December 31, 2005, the Company was in compliance
with
these covenants.
The
maturities of long-term debt for the four years following December 31, 2006
are
as follows:
|
(In
thousands)
|
|
|
2007
|
|
$
|
10,693
|
|
|
2008
|
|
|
7,961
|
|
|
2009
|
|
|
560
|
|
|
2010
|
|
|
733,279
|
|
Cash
payments for interest on all debt from continuing operations were $42.2 million,
$40.2 million and $40.1 million in 2005, 2004 and 2003, respectively.
7. Leases
The
Company leases certain property and equipment under noncancelable operating
leases. Rental expense (for both continuing and discontinued operations)
under
such operating leases was $52.1 million, $49.4 million and $48.5 million
in
2005, 2004 and 2003, respectively.
Future
minimum payments under operating leases with noncancelable terms are as
follows:
|
(In
thousands)
|
|
|
2006
|
|
$
|
40,981
|
|
|
2007
|
|
|
30,866
|
|
|
2008
|
|
|
20,882
|
|
|
2009
|
|
|
21,746
|
|
|
2010
|
|
|
7,624
|
|
|
After
2010
|
|
|
22,661
|
|
Total
minimum rentals to be received in the future under non-cancelable subleases
as
of December 31, 2005 are $21.2 million.
8. Employee
Benefit Plans
Pension
Benefits
The
Company has pension and profit sharing retirement plans covering a substantial
number of its employees. The defined benefits for salaried employees generally
are based on years of service and the employee's level of compensation during
specified periods of employment. Plans covering hourly employees generally
provide benefits of stated amounts for each year of service. The multi-employer
plans in which the Company participates provide benefits to certain unionized
employees. The Company's funding policy for qualified plans is consistent
with
statutory regulations and customarily equals the amount deducted for income
tax
purposes. The Company also makes periodic voluntary contributions as recommended
by its pension committee. The Company's policy is to amortize prior service
costs of defined benefit pension plans over the average future service period
of
active plan participants. The Company uses an October 31 measurement date
for
its United States defined benefit pension plans and recently acquired
international plans. A September 30 measurement date is used for other
international defined benefit pension plans.
For
a
majority of the U.S. defined benefit pension plans and certain international
defined benefit pension plans, accrued service will no longer be granted
for
periods after December 31, 2003. In place of these plans, the Company has
established, effective January 1, 2004, defined contribution pension plans
providing for the Company to contribute a specified matching amount for
participating employees’ contributions to the plan. Domestically, this match is
made on employee contributions up to four percent of their eligible
compensation. Additionally, the Company may provide a discretionary contribution
of up to two percent of compensation for eligible employees. The two percent
discretionary contribution was recorded for the last two years, 2005 and
2004,
and paid in February of the subsequent year. Internationally, this match
is up
to six percent of eligible compensation with an additional two percent going
towards insurance and administrative costs. The Company believes these new
defined contribution plans will provide a more predictable and less volatile
pension expense than exists under the defined benefit plans.
|
|
|
|
|
|
(In
thousands)
|
|
U.
S. Plans
|
|
International
Plans
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
Pension
Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
3,380
|
|
$
|
2,610
|
|
$
|
7,339
|
|
$
|
8,195
|
|
$
|
9,561
|
|
$
|
10,439
|
|
Interest
cost
|
|
|
13,914
|
|
|
13,592
|
|
|
13,201
|
|
|
40,475
|
|
|
37,876
|
|
|
32,627
|
|
Expected
return on plan assets
|
|
|
(19,112
|
)
|
|
(17,960
|
)
|
|
(15,758
|
)
|
|
(44,796
|
)
|
|
(39,765
|
)
|
|
(34,083
|
)
|
Recognized
prior service costs
|
|
|
767
|
|
|
754
|
|
|
726
|
|
|
1,208
|
|
|
1,245
|
|
|
1,117
|
|
Recognized
losses
|
|
|
3,617
|
|
|
2,982
|
|
|
4,409
|
|
|
12,247
|
|
|
13,431
|
|
|
9,813
|
|
Amortization
of transition (asset) liability
|
|
|
(1,455
|
)
|
|
(1,466
|
)
|
|
(1,466
|
)
|
|
117
|
|
|
(567
|
)
|
|
(626
|
)
|
Settlement/Curtailment
loss (gain)
|
|
|
(3
|
)
|
|
131
|
|
|
36
|
|
|
50
|
|
|
—
|
|
|
8
|
|
Defined
benefit plans pension expense
|
|
|
1,108
|
|
|
643
|
|
|
8,487
|
|
|
17,496
|
|
|
21,781
|
|
|
19,295
|
|
Multi-employer
plans
|
|
|
8,156
|
|
|
7,674
|
|
|
6,020
|
|
|
5,579
|
|
|
5,395
|
|
|
4,389
|
|
Defined
contribution plans
|
|
|
7,522
|
|
|
6,197
|
|
|
527
|
|
|
5,901
|
|
|
5,722
|
|
|
2,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
expense
|
|
$
|
16,786
|
|
$
|
14,514
|
|
$
|
15,034
|
|
$
|
28,976
|
|
$
|
32,898
|
|
$
|
26,013
|
|
The
change in the financial status of the pension plans and amounts recognized
in
the Consolidated Balance Sheets at December 31, 2005 and 2004 are as
follows:
Defined
Benefit Pension Benefits
|
|
U.
S. Plans
|
|
International
Plans
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
243,568
|
|
$
|
221,695
|
|
$
|
746,573
|
|
$
|
660,441
|
|
Service
cost
|
|
|
3,380
|
|
|
2,610
|
|
|
8,195
|
|
|
9,561
|
|
Interest
cost
|
|
|
13,914
|
|
|
13,592
|
|
|
40,475
|
|
|
37,876
|
|
Plan
participants’ contributions
|
|
|
—
|
|
|
|
|
|
1,866
|
|
|
2,691
|
|
Amendments
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
Actuarial
loss
|
|
|
5,300
|
|
|
18,094
|
|
|
86,447
|
|
|
15,074
|
|
Settlements/curtailments
|
|
|
|
|
|
(22
|
)
|
|
(541
|
)
|
|
(54
|
)
|
Benefits
paid
|
|
|
(11,244
|
)
|
|
(12,401
|
)
|
|
(28,602
|
)
|
|
(30,113
|
)
|
Obligations
of added plans
|
|
|
|
|
|
|
|
|
20,695
|
|
|
|
|
Effect
of foreign currency
|
|
|
|
|
|
|
|
|
(76,774
|
)
|
|
51,097
|
|
Benefit
obligation at end of year
|
|
$
|
255,629
|
|
$
|
243,568
|
|
$
|
798,334
|
|
$
|
746,573
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
223,108
|
|
$
|
209,130
|
|
$
|
617,097
|
|
$
|
522,185
|
|
Actual
return on plan assets
|
|
|
26,377
|
|
|
23,096
|
|
|
104,295
|
|
|
52,900
|
|
Employer
contributions
|
|
|
8,439
|
|
|
3,283
|
|
|
40,367
|
|
|
34,528
|
|
Plan
participants’ contributions
|
|
|
|
|
|
|
|
|
1,868
|
|
|
2,692
|
|
Benefits
paid
|
|
|
(11,244
|
)
|
|
(12,401
|
)
|
|
(28,225
|
)
|
|
(29,774
|
)
|
Plan
assets of added plans
|
|
|
|
|
|
|
|
|
10,292
|
|
|
|
|
Effect
of foreign currency
|
|
|
|
|
|
|
|
|
(75,545
|
)
|
|
34,566
|
|
Fair
value of plan assets at end of year
|
|
$
|
246,680
|
|
$
|
223,108
|
|
$
|
670,149
|
|
$
|
617,097
|
|
Funded
status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$
|
(8,949
|
)
|
$
|
(20,460
|
)
|
$
|
(128,185
|
)
|
$
|
(129,476
|
)
|
Unrecognized
net loss
|
|
|
54,593
|
|
|
60,173
|
|
|
229,454
|
|
|
240,797
|
|
Unrecognized
transition (asset) obligation
|
|
|
(361
|
)
|
|
(1,817
|
)
|
|
332
|
|
|
478
|
|
Unrecognized
prior service cost
|
|
|
3,802
|
|
|
3,858
|
|
|
9,643
|
|
|
12,085
|
|
Net
amount recognized
|
|
$
|
49,085
|
|
$
|
41,754
|
|
$
|
111,244
|
|
$
|
123,884
|
|
Amounts
recognized in the Consolidated Balance Sheets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$
|
62,407
|
|
$
|
54,613
|
|
$
|
|
|
$
|
|
|
Accrued
benefit liability
|
|
|
(31,416
|
)
|
|
(37,187
|
)
|
|
(85,625
|
)
|
|
(91,115
|
)
|
Intangible
asset
|
|
|
2,173
|
|
|
3,209
|
|
|
9,537
|
|
|
11,733
|
|
Accumulated
other comprehensive loss
|
|
|
15,921
|
|
|
21,119
|
|
|
187,332
|
|
|
203,266
|
|
Net
amount recognized
|
|
$
|
49,085
|
|
$
|
41,754
|
|
$
|
111,244
|
|
$
|
123,884
|
|
The
Company’s best estimate of expected contributions to be paid in year 2006 for
the U.S. defined benefit plans is $1.0 million and for the international
defined
benefit plans is $19.8 million.
Contributions
to multiemployer pension plans were $13.6 million and $15.2 million in years
2005 and 2004, respectively. For defined contributions, payments were $12.9
million and $9.7 million for years 2005 and 2004, respectively.
Future
Benefit Payments
The
expected benefit payments for defined benefit plans over the next ten years
are
as follows:
|
(In
millions)
|
|
U.S.
Plans
|
|
International
Plans
|
|
|
2006
|
|
$
|
10.3
|
|
$
|
28.4
|
|
|
2007
|
|
|
11.2
|
|
|
28.5
|
|
|
2008
|
|
|
11.8
|
|
|
29.4
|
|
|
2009
|
|
|
12.6
|
|
|
30.4
|
|
|
2010
|
|
|
13.5
|
|
|
32.8
|
|
|
2011
- 2015
|
|
|
81.6
|
|
|
175.7
|
|
Net
Periodic Pension Expense Assumptions
The
weighted-average actuarial assumptions used to determine the net periodic
pension expense for the years ended December 31 were as follows:
|
|
|
Global
Weighted Average
December
31
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Discount
rates
|
|
|
5.7
|
%
|
|
5.9
|
%
|
|
6.0
|
%
|
|
Expected
long-term rates of return on plan assets
|
|
|
7.8
|
%
|
|
7.9
|
%
|
|
8.0
|
%
|
|
Rates
of compensation increase
|
|
|
3.4
|
%
|
|
3.5
|
%
|
|
3.4
|
%
|
|
|
|
U.
S. Plans
December
31
|
|
International
Plans
December
31
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
|
Discount
rates
|
|
|
5.75
|
%
|
|
6.25
|
%
|
|
6.75
|
%
|
|
5.7
|
%
|
|
5.7
|
%
|
|
5.8
|
%
|
|
Expected
long-term rates of return on plan assets
|
|
|
8.75
|
%
|
|
8.75
|
%
|
|
8.9
|
%
|
|
7.5
|
%
|
|
7.5
|
%
|
|
7.6
|
%
|
|
Rates
of compensation increase
|
|
|
4.0
|
%
|
|
4.0
|
%
|
|
3.8
|
%
|
|
3.3
|
%
|
|
3.4
|
%
|
|
3.3
|
%
|
The
expected long-term rates of return on plan assets for the 2006 pension expense
are 8.25% for the U.S. plans and 7.4% for the international plans.
Defined
Benefit Pension Obligation Assumptions
The
weighted-average actuarial assumptions used to determine the defined benefit
pension plan obligations at December 31 were as follows:
|
|
|
Global
Weighted Average
December
31
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Discount
rates
|
|
|
5.3
|
%
|
|
5.7
|
%
|
|
5.9
|
%
|
|
Rates
of compensation increase
|
|
|
3.4
|
%
|
|
3.5
|
%
|
|
3.5
|
%
|
|
|
|
U.
S. Plans
December
31
|
|
International
Plans
December
31
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
|
Discount
rates
|
|
|
5.87
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
|
5.2
|
%
|
|
5.7
|
%
|
|
5.7
|
%
|
|
Rates
of compensation increase
|
|
|
4.36
|
%
|
|
4.0
|
%
|
|
4.0
|
%
|
|
3.2
|
%
|
|
3.3
|
%
|
|
3.4
|
%
|
The
U.S.
discount rate was determined using a yield curve that was produced from a
universe containing over 500 U.S.-issued, AA-graded corporate bonds, all
of
which were noncallable (or callable with make whole provisions), and excluding
the 10% of the bonds with the highest yields and the 10% with the lowest
yields.
The discount rate was then developed as the level-equivalent rate that would
produce the same present value as that using spot rates to discount the
projected benefit payments. For international plans, the discount rate is
aligned to Corporate bond yields in the local markets, normally AA-rated
Corporations. The process and selection seeks to approximate the cash outflows
with the timing and amounts of the expected benefit payments. As of the
September 30, 2005 measurement date, these rates have declined by about one
half
of one percent from the prior year.
Accumulated
Benefit Obligations
The
accumulated benefit obligation for all defined benefit pension plans at December
31 was as follows:
|
(In
millions)
|
|
U.S.
Plans
|
|
International
Plans
|
|
|
2005
|
|
$
|
244.4
|
|
$
|
744.7
|
|
|
2004
|
|
|
231.6
|
|
|
705.3
|
|
Plans
with Accumulated Benefit Obligation in Excess of Plan
Assets
The
projected benefit obligation, accumulated benefit obligation and fair value
of
plan assets for pension plans with accumulated benefit obligations in excess
of
plan assets at December 31 were as follows:
|
|
|
U.
S. Plans
|
|
International
Plans
|
|
|
|
(In
millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
Projected
benefit obligation
|
|
$
|
76.8
|
|
$
|
75.6
|
|
$
|
778.2
|
|
$
|
737.3
|
|
|
|
Accumulated
benefit obligation
|
|
|
74.2
|
|
|
73.8
|
|
|
730.1
|
|
|
697.8
|
|
|
|
Fair
value of plan assets
|
|
|
44.9
|
|
|
40.7
|
|
|
644.8
|
|
|
605.4
|
|
|
The
decrease in the minimum liability included in other comprehensive income
(loss)
net of taxes was $14.7 million in 2005. The increase in the minimum liability
included in other comprehensive income (loss) net of taxes was ($4.5) million
in
2004.
The
asset
allocations attributable to the Company’s U.S. pension plans at October 31, 2005
and 2004 and the target allocation of plan assets for 2006, by asset category,
are as follows:
|
|
|
|
|
|
U.S.
Plans |
|
Target
2006
|
|
Percentage
of Plan Assets at October 31
|
|
Asset
Category |
|
Allocation
|
|
2005
|
|
2004
|
|
Domestic
Equity Securities
|
|
47%
- 57
|
%
|
|
51.9
|
%
|
|
52.6
|
%
|
|
Fixed
Income Securities
|
|
27%
- 37
|
%
|
|
29.0
|
%
|
|
32.5
|
%
|
|
International
Equity Securities
|
|
4.5%
- 14.5
|
%
|
|
10.7
|
%
|
|
10.5
|
%
|
|
Cash
& Cash Equivalents
|
|
0%
- 5
|
%
|
|
4.1
|
%
|
|
1.8
|
%
|
|
Other
|
|
2%
- 6
|
%
|
|
4.3
|
%
|
|
2.6
|
%
|
|
Plan
assets are allocated among various categories of equities, fixed income,
cash
and cash equivalents with professional investment managers whose performance
is
actively monitored. The primary investment objective is long-term growth
of
assets in order to meet present and future benefit obligations. The Company
periodically conducts an asset/liability modeling study to ensure the investment
strategy is aligned with the profile of benefit obligations.
The
Company reviews the long-term expected return on asset assumption on a periodic
basis taking into account a variety of factors including the historical
investment returns achieved over a long-term period, the targeted allocation
of
plan assets and future expectations based on a model of asset returns for
an
actively managed portfolio, inflation and administrative/other expenses.
The
model simulates 500 different capital market results over 15 years. For 2006,
the expected return on asset assumption is 8.25%. The Company had lowered
its
expected return on asset assumption from 8.75% in 2005 and 2004 due to changes
in capital market expectations.
The
U.S.
defined benefit pension plans assets include 382,640 shares of the Company’s
stock valued at $24.4 million and $18.2 million on October 31, 2005 and 2004,
respectively, representing 9.9% and 8.2%, respectively, of total plan assets.
As
part of a rebalancing of the pension fund to further diversify the plan assets,
approximately one-half of the pension
fund’s
holdings in the Company’s stock were sold in the second quarter of 2004. As of
December 31, 2005, the Company’s stock represented 9.9% of total plan assets.
The Company is considering a further rebalancing of the Company’s stock in the
pension fund during 2006. Dividends paid to the pension plans on the Company
stock amounted to $0.4 million in 2005 and $0.6 million in 2004.
The
asset
allocations attributable to the Company’s international plans at September 30,
2005 and 2004 and the target allocation of plan assets for 2006, by asset
category, are as follows:
|
|
|
|
|
|
International
Plans |
|
Target
2006
|
|
Percentage
of Plan Assets at September 30
|
|
Asset
Category |
|
Allocation
|
|
2005
|
|
2004
|
|
|
|
55.5%
- 64.5
|
%
|
|
57.1
|
%
|
|
57.5
|
%
|
|
|
|
37.5%
- 42.5
|
%
|
|
40.8
|
%
|
|
42.0
|
%
|
|
|
|
0
|
%
|
|
1.0
|
%
|
|
0.4
|
%
|
|
Other
|
|
0
|
%
|
|
1.1
|
%
|
|
0.1
|
%
|
|
Plan
assets as of September 30, 2005, in the United Kingdom (U.K.) defined benefit
pension plan amounted to over 90% of the international pension assets. These
assets were divided into portfolios representing various categories of equities,
fixed income, cash and cash equivalents managed by a number of professional
investment managers.
The
primary investment objective is long-term growth of assets in order to meet
present and future benefit obligations. The Company periodically conducts
asset/liability modeling studies to ensure the investment strategies are
aligned
with the profile of benefit obligations. For the international long-term
rate of
return, the Company considered the current level of expected returns in
risk-free investments (primarily government bonds), the historical level
of the
risk premium associated with other asset classes in which the portfolio is
invested and the expectations for future returns of each asset class and
plan
expenses. The expected return for each asset class was then weighted based
on
the target asset allocation to develop the expected long-term rate of return
on
assets. The expected return-on-asset assumption was 7.75% for the U.K. plan
in
2005. The Company has reduced the expected rate of return to 7.50% for 2006.
The
remaining international pension plans with assets representing less than
10% of
the international pension assets are under the guidance of professional
investment managers and have similar investment objectives.
Postretirement
Benefits
The
Company has postretirement health care benefits for a limited number of
employees mainly under plans related to acquired companies and postretirement
life insurance benefits for certain hourly employees. The costs of health
care
and life insurance benefits are accrued for current and future retirees and
are
recognized as determined under the projected unit credit actuarial method.
Under
this method, the Company's obligation for postretirement benefits is to be
fully
accrued by the date employees attain full eligibility for such benefits.
The
Company's postretirement health care and life insurance plans are unfunded.
The
Company uses an October 31 measurement date for its postretirement benefit
plans.
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Postretirement
Benefits Expense (Income)
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
7
|
|
$
|
11
|
|
$
|
21
|
|
Interest
cost
|
|
|
200
|
|
|
342
|
|
|
553
|
|
Recognized
prior service costs
|
|
|
7
|
|
|
32
|
|
|
32
|
|
Recognized
(gains) or losses
|
|
|
(37
|
)
|
|
39
|
|
|
66
|
|
Curtailment
gains
|
|
|
(318
|
)
|
|
(2,236
|
)
|
|
(4,898
|
)
|
Postretirement
benefit income
|
|
$
|
(141
|
)
|
$
|
(1,812
|
)
|
$
|
(4,226
|
)
|
The
curtailment gains of $0.3 million for 2005 and $2.2 million for 2004 were
due to
the termination of certain retiree health care plans. The curtailment gain
of
$4.9 million for 2003 was due to the termination of certain retiree life
insurance and health care plans.
Effective
October 31, 2004, the Company adopted the provisions of Financial Accounting
Standards Board Staff Position No. 106-2, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003” (FSP FAS 106-2). Adoption of FSP FAS 106-2 reduced
the Company’s accumulated postretirement benefit obligation by $0.3 million as
of December 31, 2004. This amount was treated as an unrecognized actuarial
gain.
The Company deferred re-measurement of its postretirement health care benefit
obligation until its measurement date, so there was no effect on 2004 reported
expense. The year 2005 expense decreased by $36 thousand, after reflecting
the
value of the federal subsidy. The Company’s accumulated postretirement benefit
obligation decreased by $255 thousand as of December 31, 2005.
The
changes in the postretirement benefit liability recorded in the Consolidated
Balance Sheets are as follows:
Postretirement
Benefits
(In
thousands)
|
|
2005
|
|
2004
|
|
Change
in benefit obligation:
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
4,187
|
|
$
|
7,405
|
|
Service
cost
|
|
|
7
|
|
|
11
|
|
Interest
cost
|
|
|
200
|
|
|
342
|
|
Actuarial
gain
|
|
|
(117
|
)
|
|
(654
|
)
|
Plan
participants’ contributions
|
|
|
25
|
|
|
48
|
|
Benefits
paid
|
|
|
(311
|
)
|
|
(369
|
)
|
Plan
amendments
|
|
|
—
|
|
|
4
|
|
Curtailment
|
|
|
(670
|
)
|
|
(2,600
|
)
|
Benefit
obligation at end of year
|
|
$
|
3,321
|
|
$
|
4,187
|
|
Funded
status:
|
|
|
|
|
|
Funded
status at end of year
|
|
$
|
(3,321
|
)
|
$
|
(4,187
|
)
|
Unrecognized
prior service cost
|
|
|
17
|
|
|
296
|
|
Unrecognized
net actuarial gain
|
|
|
(256
|
)
|
|
(95
|
)
|
Net
amount recognized as accrued benefit liability
|
|
$
|
(3,560
|
)
|
$
|
(3,986
|
)
|
The
actuarial assumptions used to determine the postretirement benefit obligation
are as follows:
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Assumed
discount rate
|
|
|
5.87
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
Health
care cost trend rate
|
|
|
10.00
|
%
|
|
10.00
|
%
|
|
12.00
|
%
|
Decreasing
to ultimate rate
|
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of one percent increase in health care cost trend rate:
|
|
|
|
|
|
|
|
|
|
|
On
total service and interest cost components
|
|
$
|
10
|
|
$
|
15
|
|
$
|
24
|
|
On
postretirement benefit obligation
|
|
$
|
166
|
|
$
|
239
|
|
$
|
373
|
|
Effect
of one percent decrease in health care cost trend rate:
|
|
|
|
|
|
|
|
|
|
|
On
total service and interest cost components
|
|
$
|
(9
|
)
|
$
|
(13
|
)
|
$
|
(21
|
)
|
On
postretirement benefit obligation
|
|
$
|
(149
|
)
|
$
|
(212
|
)
|
$
|
(336
|
)
|
It
is
anticipated that the health care cost trend rate will decrease from 10% in
2006
to 5.0% in the year 2011.
The
assumed discount rates to determine the postretirement benefit expense for
the
years 2005, 2004 and 2003 were 5.75%, 6.25% and 6.75%,
respectively.
The
Company’s expected benefit payments over the next ten years are as
follows:
(In
thousands)
|
|
Benefits
Payments Before Subsidy
|
|
Expected
Subsidy Under Medicare Modernization Act
|
|
|
2006
|
|
$
|
326
|
|
$
|
27
|
|
|
2007
|
|
|
320
|
|
|
27
|
|
|
2008
|
|
|
321
|
|
|
28
|
|
|
2009
|
|
|
319
|
|
|
28
|
|
|
2010
|
|
|
314
|
|
|
28
|
|
|
2011
- 2015
|
|
|
1,435
|
|
|
125
|
|
|
Savings
Plan
Prior
to
January 1, 2004, the Company had a 401(k) Savings Plan (the Savings Plan)
which
covered substantially all U.S. employees with the exception of employees
represented by a collective bargaining agreement, unless the agreement expressly
provides otherwise. Effective January 1, 2004, certain U.S. employees previously
covered by the Savings Plan were transferred into the Harsco Retirement Savings
& Investment Plan (HRSIP) which is a defined contribution pension plan. The
transferred employees were those whose credited years of service under the
qualified Defined Benefit Pension Plan were frozen as of December 31, 2003
(as
discussed in the Pension Benefits section of this footnote). Employees whose
credited service was not frozen as of December 31, 2003 remained in the Savings
Plan. The expenses related to the HRSIP are included in the defined contribution
pension plans disclosure in the Pension Benefits section of this
footnote.
Employee
contributions to the Savings Plan are generally determined as a percentage
of
covered employees' compensation. The expense for contributions to the Savings
Plan by the Company was $ 0.9
million, $0.4 million and $3.5 million for 2005, 2004 and 2003, respectively.
Employee
directed investments in the Savings Plan and HRSIP include the following
amounts
of Company stock:
Company
Shares in Plans
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
December
31, 2003
|
|
(Dollars
in millions)
|
|
Number
of Shares
|
|
Fair
Market Value
|
|
Number
of Shares
|
|
Fair
Market Value
|
|
Number
of Shares
|
|
Fair
Market Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
Plan
|
|
|
929,537
|
|
$
|
62.8
|
|
|
1,017,241
|
|
$
|
56.7
|
|
|
2,143,820
|
|
$
|
93.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRSIP
|
|
|
921,258
|
|
|
62.2
|
|
|
954,442
|
|
|
53.2
|
|
|
—
|
|
|
|
|
Executive
Incentive Compensation Plan
The
amended 1995 Executive Incentive Compensation Plan, as approved by the
Management Development and Compensation Committee of the Board of Directors,
provides the basis for determination of annual incentive compensation awards
under a performance-based Economic Value Added (EVA®) plan. Actual cash awards
are usually paid in January or February of the following year. The Company
accrues amounts reflecting the estimated value of incentive compensation
anticipated to be earned for the year. Total executive incentive compensation
expense was $6.1 million, $4.5 million and $4.0 million in 2005, 2004 and
2003,
respectively. The 2005 expense included performance-based restricted stock
units
(RSUs) that were granted to certain officers of the Company. There were no
RSUs
granted to officers in 2004 or 2003. See Note 12, “Stock-Based Compensation,”
for additional information on the equity component of executive
compensation.
9. Income
Taxes
Income
before income taxes and minority interest for both continuing and discontinued
operations in the Consolidated Statements of Income consists of the
following:
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
74,013
|
|
$
|
57,566
|
|
$
|
53,549
|
|
International
|
|
|
156,107
|
|
|
125,619
|
|
|
90,480
|
|
Total
income before income taxes and minority interest
|
|
$
|
230,120
|
|
$
|
183,185
|
|
$
|
144,029
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense/(benefit):
|
|
|
|
|
|
|
|
|
|
|
Currently
payable:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
24,260
|
|
$
|
(2,788
|
)
|
$
|
5,275
|
|
State
|
|
|
637
|
|
|
(281
|
)
|
|
(961
|
)
|
International
|
|
|
34,381
|
|
|
31,471
|
|
|
24,233
|
|
Total
income taxes currently payable
|
|
|
59,278
|
|
|
28,402
|
|
|
28,547
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
federal and state
|
|
|
4,550
|
|
|
17,110
|
|
|
12,255
|
|
Deferred
international
|
|
|
887
|
|
|
7,797
|
|
|
3,815
|
|
Total
income tax expense
|
|
$
|
64,715
|
|
$
|
53,309
|
|
$
|
44,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
64,771
|
|
$
|
49,034
|
|
$
|
41,708
|
|
Discontinued
Operations
|
|
|
(56
|
)
|
|
4,275
|
|
|
2,909
|
|
Total
income tax expense
|
|
$
|
64,715
|
|
$
|
53,309
|
|
$
|
44,617
|
|
Cash
payments for income taxes were $58.6 million, $26.2 million and $23.5 million,
for 2005, 2004 and 2003, respectively.
The
following is a reconciliation of the normal expected statutory U.S. federal
income tax rate to the effective rate as a percentage of Income before income
taxes and minority interest for both continuing and discontinued operations
as
reported in the Consolidated Statements of Income:
|
|
2005
|
|
2004
|
|
2003
|
|
U.S.
federal income tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State
income taxes, net of federal income tax benefit
|
|
|
0.7
|
|
|
1.0
|
|
|
0.3
|
|
Export
sales corporation benefit/domestic manufacturing deduction
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
(0.7
|
)
|
Deductible
401(k) dividends
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
|
(0.6
|
)
|
Losses
for which no tax benefit was recorded
|
|
|
0.0
|
|
|
0.0
|
|
|
0.1
|
|
Difference
in effective tax rates on international earnings and
remittances
|
|
|
(5.4
|
)
|
|
(1.7
|
)
|
|
(2.2
|
)
|
Settlement
of tax contingencies
|
|
|
(0.9
|
)
|
|
(3.3
|
)
|
|
(1.1
|
)
|
Other,
net
|
|
|
(0.3
|
)
|
|
(0.9
|
)
|
|
0.2
|
|
Effective
income tax rate
|
|
|
28.1
|
%
|
|
29.1
|
%
|
|
31.0
|
%
|
The
difference in effective tax rates on international earnings and remittances
from
2004 to 2005 includes a one-time benefit recorded in the fourth quarter of
2005
of $2.7 million associated with funds repatriated under the American Jobs
Creation Act of 2004 (AJCA). Additionally, during the fourth quarter of 2005,
consistent with the Company’s strategic plan of investing for growth, the
Company designated certain international earnings as permanently reinvested
which resulted in a one-time income tax benefit of $3.6 million.
The
tax
effects of the primary temporary differences giving rise to the Company's
deferred tax assets and liabilities for the years ended December 31, 2005
and
2004 are as follows:
(In
thousands) |
|
2005
|
|
2004
|
|
Deferred
income taxes
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
|
Depreciation
|
|
$
|
—
|
|
$
|
143,802
|
|
$
|
|
|
$
|
111,967
|
|
Expense
accruals
|
|
|
23,951
|
|
|
|
|
|
22,437
|
|
|
|
|
Inventories
|
|
|
3,510
|
|
|
|
|
|
3,268
|
|
|
|
|
Provision
for receivables
|
|
|
1,578
|
|
|
|
|
|
3,225
|
|
|
|
|
Postretirement
benefits
|
|
|
1,340
|
|
|
|
|
|
1,475
|
|
|
|
|
Deferred
revenue
|
|
|
|
|
|
4,941
|
|
|
|
|
|
3,770
|
|
Operating
loss carryforwards
|
|
|
22,340
|
|
|
|
|
|
19,667
|
|
|
|
|
Deferred
foreign tax credits
|
|
|
8,708
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
26,764
|
|
|
17,129
|
|
|
25,649
|
|
|
9,493
|
|
Currency
translation adjustment
|
|
|
2,846
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
4,615
|
|
|
428
|
|
|
5,292
|
|
|
4,071
|
|
Subtotal
|
|
|
95,652
|
|
|
166,300
|
|
|
81,013
|
|
|
129,301
|
|
Valuation
allowance
|
|
|
(21,682
|
)
|
|
|
|
|
(17,492
|
)
|
|
|
|
Total
deferred income taxes
|
|
$
|
73,970
|
|
$
|
166,300
|
|
$
|
63,521
|
|
$
|
129,301
|
|
At
December 31, 2005 and 2004, Other current assets included deferred income
tax
benefits of $29.8 million and $28.9 million, respectively.
At
December 31, 2005, after-tax net operating loss carryforwards (NOLs) totaled
$22.3 million. Of that amount, $10.8 million is attributable to international
operations, $0.3 million can be carried forward five years, $0.8 million
can be
carried forward ten years and $9.7 million can be carried forward indefinitely.
After-tax federal NOLs are $2.0 million and expire in 2018. After-tax U.S.
state
NOLs are $9.5 million. Of that amount, $1.3 million expire in 2006-2012,
$3.9
million expire in 2013-2020, and $4.3 million expire in 2025. Included in
the
above-mentioned total are $8.1 million of preacquisition NOLs.
The
valuation allowance of $21.7 million and $17.5 million at December 31, 2005
and
2004, respectively, related principally to NOLs which are uncertain as to
realizability. To the extent that the preacquisition NOLs are utilized in
the
future and the associated valuation allowance reduced, the tax benefit will
be
allocated to reduce goodwill.
The
change in the valuation allowances for 2005 and 2004 results primarily from
the
utilization of NOLs, the release of valuation allowances in certain
jurisdictions based on the Company's revaluation of the realizability of
future
benefits, recent acquisitions and the increase in valuation allowances in
certain jurisdictions based on the Company’s revaluation of the realizability of
future benefits.
The
Company has not provided U.S. income taxes on certain of its non-U.S.
subsidiaries’ undistributed earnings as such amounts are permanently reinvested
outside the U.S. At December 31, 2005 and 2004, such earnings were approximately
$295 million and $86 million, respectively. The Company has various tax holidays
in Europe, the Middle East and Asia that expire between 2005 and 2010. During
2005, 2004 and 2003, these tax holidays resulted in approximately $2.4 million,
$4.2 million and $3.6 million, respectively, in reduced income tax expense.
On
October 22, 2004, the AJCA was signed into law. The AJCA includes a deduction
of
85% for certain international earnings that are repatriated, as defined in
the
AJCA, to the U.S. The Company completed its evaluation of the repatriation
provisions of the AJCA and repatriated qualified earnings of approximately
$24
million in the fourth quarter of 2005. This resulted in the Company receiving
a
one-time income tax benefit of approximately $2.7 million during the fourth
quarter of 2005.
10. Commitments
and Contingencies
Environmental
The
Company is involved in a number of environmental remediation investigations
and
clean-ups and, along with other companies, has been identified as a "potentially
responsible party" for certain waste disposal sites. While each of
these
matters
is subject to various uncertainties, it is probable that the Company will
agree
to make payments toward funding certain of these activities and it is possible
that some of these matters will be decided unfavorably to the Company. The
Company has evaluated its potential liability, and its financial exposure
is
dependent upon such factors as the continuing evolution of environmental
laws
and regulatory requirements, the availability and application of technology,
the
allocation of cost among potentially responsible parties, the years of remedial
activity required and the remediation methods selected. The Consolidated
Balance
Sheets at December 31, 2005 and 2004 include accruals of $2.8 million and
$2.7
million, respectively, for environmental matters. The amounts charged against
pre-tax income related to environmental matters totaled $1.5 million, $2.1
million and $1.4 million in 2005, 2004 and 2003, respectively.
The
liability for future remediation costs is evaluated on a quarterly basis.
Actual
costs to be incurred at identified sites in future periods may vary from
the
estimates, given inherent uncertainties in evaluating environmental exposures.
The Company does not expect that any sum it may have to pay in connection
with
environmental matters in excess of the amounts recorded or disclosed above
would
have a material adverse effect on its financial position, results of operations
or cash flows.
Royalty
Expense Dispute
The
Company is involved in a royalty expense dispute with Canada Revenue Agency
(“CRA”). The CRA is proposing to disallow certain royalty expense
deductions claimed by the Company’s Canadian subsidiary on its 1994-1998 tax
returns. As of December 31, 2005, the maximum assessment from the CRA for
the period 1994-1998 is approximately $10.0 million including tax and interest.
The Ontario Ministry of Finance (“Ontario”) is also proposing to disallow
these same deductions for the period 1994-1998. As of December 31, 2005,
the maximum assessment from Ontario is approximately $3.3 million including
tax
and interest. The Company has filed administrative appeals and will
vigorously contest these disallowances.
The
Company currently anticipates that, ultimately, it may have liability for
some
portion of the assessment in this royalty expense dispute. However, the
Company intends to utilize competent authority proceedings in the U.S. to
recover a portion of any required tax payment amount. The Company believes
that any amount not recovered through these proceedings has been fully reserved
as of December 31, 2005 and, therefore will not have a material adverse effect
on the Company’s future results of operations or financial condition. In
accordance with Canadian tax law, the Company made a payment to the CRA in
the
fourth quarter of 2005 of $5.0 million, or one-half of the disputed
amount. Additionally, the Company has agreed to pay Ontario approximately
$22 thousand per month until the claim with CRA has been settled. These
payments were made for tax compliance purposes and to reduce potential interest
expense on the disputed amount. These payments in no way reflect the
Company’s acknowledgement as to the validity of the assessed
amounts.
Other
The
Company has been named as one of many defendants (approximately 90 or more
in
most cases) in legal actions alleging personal injury from exposure to airborne
asbestos over the past several decades. In their suits, the plaintiffs have
named as defendants, among others, many manufacturers, distributors and
installers of numerous types of equipment or products that allegedly contained
asbestos.
The
Company believes that the claims against it are without merit. The Company
has
never been a producer, manufacturer or processor of asbestos fibers. Any
component within a Company product which may have contained asbestos would
have
been purchased from a supplier. Based on scientific and medical evidence,
the
Company believes that any asbestos exposure arising from normal use of any
Company product never presented any harmful levels of airborne asbestos
exposure, and moreover, the type of asbestos contained in any component that
was
used in those products was protectively encapsulated in other materials and
is
not associated with the types of injuries alleged in the pending suits. Finally,
in most of the depositions taken of plaintiffs to date in the litigation
against
the Company, plaintiffs have failed to specifically identify any Company
products as the source of their asbestos exposure.
The
majority of the asbestos complaints pending against the Company have been
filed
in either New York or Mississippi. Almost all of the New York complaints
contain
a standard claim for damages of $20 million or $25 million against the
approximately 90 defendants, regardless of the individual’s alleged medical
condition, and without specifically identifying any Company product as the
source of plaintiff’s asbestos exposure. With respect to the Mississippi
complaints, most contain a standard claim for an unstated amount of damages
against the numerous defendants (typically 240 to 270), without specifically
identifying any Company product as the source of plaintiff’s alleged asbestos
exposure.
As
of
December 31, 2005, there are 27,216 pending asbestos personal injury claims
filed against the Company. Of these cases, 26,239 were pending in the New
York
Supreme Court for New York County in New York State and 622 of the cases
were
pending in state courts of various counties in Mississippi. The other claims,
totaling approximately 355, are
filed
in
various counties in a number of state courts, and in certain Federal District
Courts, and those complaints assert lesser amounts of damages than the New
York
cases or do not state any amount claimed.
As
of
December 31, 2005, the Company has obtained dismissal by stipulation, or
summary
judgment prior to trial, in 16,114 cases.
In
view
of the persistence of asbestos litigation nationwide, which has not yet been
sufficiently addressed either politically or legally, the Company expects
to
continue to receive additional claims. However, there have been developments
during the past several years, both by certain state legislatures and by
certain
state courts, which could favorably affect the Company’s ability to defend these
asbestos claims in those jurisdictions. These developments include procedural
changes, docketing changes, proof of damage requirements and other changes
that
require plaintiffs to follow specific procedures in bringing their claims
and to
show proof of damages before they can proceed with their claim. An example
is
the action taken by the New York Supreme Court (a trial court), which is
responsible for managing all asbestos cases pending within New York County
in
the State of New York. This Court issued an order in December of 2002 that
created a Deferred or Inactive Docket for all pending and future asbestos
claims
filed by plaintiffs who cannot demonstrate that they have a malignant condition
or discernable physical impairment, and an Active or In Extremis Docket for
plaintiffs who are able to show such medical condition. As a result of this
order, the majority of the asbestos cases filed against the Company in New
York
County have been moved to the Inactive Docket until such time as the plaintiff
can show that they have incurred a physical impairment. As of December 31,
2005,
the Company has been listed as a defendant in 262 Active or In Extremis asbestos
cases in New York County. The Court’s Order has been challenged by
plaintiffs.
The
Company’s insurance carrier has paid all legal and settlement costs and expenses
to date. The Company has liability insurance coverage available under various
primary and excess policies that the Company believes will be available,
if
necessary, to substantially cover any liability that might ultimately be
incurred on these claims.
The
Company intends to continue its practice of vigorously defending these cases
as
they are listed for trial. It is not possible to predict the ultimate outcome
of
asbestos-related lawsuits, claims and proceedings due to the unpredictable
nature of personal injury litigation. Despite this uncertainty, and although
results of operations and cash flows for a given period could be adversely
affected by asbestos-related lawsuits, claims and proceedings, management
believes that the ultimate outcome of these cases will not have a material
adverse effect on the Company’s financial condition, results of operations or
cash flows.
The
Company is subject to various other claims and legal proceedings covering
a wide
range of matters that arose in the ordinary course of business. In the opinion
of management, all such matters are adequately covered by insurance or by
accruals, and if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a material adverse effect on the
financial position, results of operations or cash flows of the
Company.
Insurance
liabilities are recorded in accordance with SFAS 5, “Accounting for
Contingencies.” Insurance reserves have been estimated based primarily upon
actuarial calculations and reflect the undiscounted estimated liabilities
for
ultimate losses including claims incurred but not reported. Inherent in these
estimates are assumptions which are based on the Company’s history of claims and
losses, a detailed analysis of existing claims with respect to potential
value,
and current legal and legislative trends. If actual claims differ from those
projected by management, changes (either increases or decreases) to insurance
reserves may be required and would be recorded through income in the period
the
change was determined. When a recognized liability is covered by third-party
insurance, the Company records an insurance claim receivable to reflect the
covered liability. See Note 1, “Summary of Significant Accounting Policies,” for
additional information on Accrued Insurance and Loss Reserves.
11. Capital
Stock
The
authorized capital stock of the Company consists of 150,000,000 shares of
common
stock and 4,000,000 shares of preferred stock, both having a par value of
$1.25
per share. The preferred stock is issuable in series with terms as fixed
by the
Board of Directors. None of the preferred stock has been issued. On June
24,
1997, the Company adopted a revised Shareholder Rights Plan. Under that Plan,
the Board declared a dividend to stockholders of record on September 28,
1997,
of one right for each share of common stock. The rights may only be exercised
if, among other things, a person or group has acquired 15% or more, or intends
to commence a tender offer for 20% or more, of the Company's common stock.
Each
right entitles the holder to purchase 1/100th share of a new Harsco Junior
Participating Cumulative Preferred Stock at an exercise price of $150. Once
the
rights become exercisable, if any person acquires 20% or more of the Company's
common stock, the holder of a right will be entitled to receive common stock
calculated to have a value of two times the exercise price of the right.
The
rights, which expire on September 28, 2007, do not have voting power, and
may be
redeemed by the Company at a price of $.05 per right at any time until the
10th
business day following public
announcement
that a person or group has accumulated 15% or more of the Company's common
stock. At December 31, 2005, 750,000 shares of $1.25 par value preferred
stock were reserved for issuance upon exercise of the rights.
The
Board
of Directors has authorized the repurchase of shares of common stock as
follows:
|
|
No.
of Shares
Authorized
to be
Purchased
January
1
|
|
No.
of Shares
Purchased
|
|
Additional
Shares
Authorized
for
Purchase
|
|
Remaining
No. of
Shares
Authorized
for
Purchase
December
31
|
|
2003
|
|
|
499,154
|
|
|
—
|
|
|
500,846
|
|
|
1,000,000
|
|
2004
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
1,000,000
|
|
2005
|
|
|
1,000,000
|
|
|
(133)
|
(a)
|
|
|
|
|
1,000,000
|
|
(a)
|
The
133 shares purchased were not part of the share repurchase program.
They were shares which a retired employee sold to the Company in
order to
pay personal federal and state income taxes on shares issued to
the
employee upon retirement.
|
On
June
24, 2003, the Board of Directors increased the share repurchase authorization
to
1,000,000 shares. In November 2005, the Board of Directors extended the share
purchase authorization through January 31, 2007 for the 1,000,000 shares
still
remaining from the prior authorization.
In
2005,
2004 and 2003, additional issuances of treasury shares of 5,306 shares, 11,195
shares and 3,633 shares, respectively, were made for SGB stock option exercises,
employee service awards and shares related to vested restricted stock units.
The
following table summarizes the Company’s common stock:
|
|
Common
Stock
|
|
|
|
Shares
Issued
|
|
Treasury
Shares
|
|
Outstanding
Shares
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2003
|
|
|
67,034,010
|
|
|
26,494,610
|
|
|
40,539,400
|
|
Stock
Options Exercised
|
|
|
323,437
|
|
|
(2,043
|
)
|
|
325,480
|
|
Other
|
|
|
—
|
|
|
(1,590
|
)
|
|
1,590
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2003
|
|
|
67,357,447
|
|
|
26,490,977
|
|
|
40,866,470
|
|
Stock
Options Exercised
|
|
|
553,584
|
|
|
(10,945
|
)
|
|
564,529
|
|
Other
|
|
|
|
|
|
(250
|
)
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2004
|
|
|
67,911,031
|
|
|
26,479,782
|
|
|
41,431,249
|
|
Stock
Options Exercised
|
|
|
346,754
|
|
|
(4,086
|
)
|
|
350,840
|
|
Other
|
|
|
|
|
|
(1,220
|
)
|
|
1,220
|
|
Purchases
|
|
|
|
|
|
133
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2005
|
|
|
68,257,785
|
|
|
26,474,609
|
|
|
41,783,176
|
|
The
following is a reconciliation of the average shares of common stock used
to
compute basic earnings per common share to the shares used to compute diluted
earnings per common share as shown on the Consolidated Statements of
Income:
(Amounts
in thousands, except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
from continuing operations
|
|
$
|
156,750
|
|
$
|
113,540
|
|
$
|
86,999
|
|
Average
shares of common stock outstanding used to compute basic earnings
per
common share
|
|
|
41,642
|
|
|
41,129
|
|
|
40,690
|
|
Dilutive
effect of stock options and restricted stock units
|
|
|
438
|
|
|
469
|
|
|
283
|
|
Shares
used to compute dilutive effect of stock options
|
|
|
42,080
|
|
|
41,598
|
|
|
40,973
|
|
Basic
earnings per common share from continuing operations
|
|
$
|
3.76
|
|
$
|
2.76
|
|
$
|
2.14
|
|
Diluted
earnings per common share from continuing operations
|
|
$
|
3.73
|
|
$
|
2.73
|
|
$
|
2.12
|
|
All
outstanding stock options were included in the computation of diluted earnings
per share at December 31, 2005 and 2004. Options to purchase 32,000 shares
were
outstanding at December 31, 2003, but were not included in the computation
of
diluted earnings per share because the effect was antidilutive.
12. Stock-Based
Compensation
In
2004,
the Company’s stockholders approved an amendment to the 1995 Non-Employee
Directors’ Stock Plan whereby non-employee directors are granted restricted
stock or restricted stock units instead of stock options. In 2005, 6,000
restricted stock units with a fair value of $53.75 per unit were granted
to the
non-employee directors. Each non-employee director was granted 750 restricted
stock units vesting after one year. In 2004, 3,500 restricted stock units
with a
fair value of $43.42 per unit were granted to the non-employee directors.
Each
non-employee director was granted 500 restricted stock units vesting after
one
year. The restricted stock units require no payment from the recipient and
compensation cost is measured based on the market price on the grant date
and is
recorded over the vesting period. Restricted stock units issued to non-employee
directors will be exchanged for a like number of shares of Company stock
following termination of the participant’s service as a director. As issued,
restricted stock units do not have an option for cash payout. Compensation
expense related to the non-employee directors restricted stock unit awards
totaled $0.3 million in 2005.
In
2004,
the Company’s stockholders approved a proposal to amend the 1995 Executive
Incentive Compensation Plan in order to meet new requirements of the New
York
Stock Exchange and to comply with tax law changes. During 2004, no stock
options
or restricted stock units were granted to officers or employees. In 2004,
the
Management Development and Compensation Committee of the Board of Directors
approved the granting of restricted stock units as the long-term equity
component of officer compensation. In the first quarter of 2005, the Company
issued 32,700 performance-based restricted stock units with a fair value
of
$50.41 per unit to certain officers of the Company. Additionally, in the
first
quarter of 2006, the Company issued 46,550 performance-based restricted stock
units with a fair value of $67.70 per unit to certain officers of the Company.
Restricted stock units granted to officers vest after three years of continuous
employment. After the restricted stock units vest, they will be exchanged
for a
like number of shares of Company stock. These restricted stock units are
not
redeemable for cash. Compensation expense related to the officers’ restricted
stock unit awards totaled $0.5 million in 2005.
No
stock
options were granted during 2004 and 2005. During 2003, stock options were
only
granted to non-employee directors. The fair value of stock options granted
during 2003 was estimated on the date of grant using the binomial option
pricing
model. The Company discloses the pro forma effect of accounting for stock
options under the fair value method in Note 1, “Summary of Significant
Accounting Policies.” The weighted-average assumptions used and the estimated
fair value are as follows:
Stock
Options
|
|
2003
|
|
Expected
term
|
|
|
7.5
years
|
|
Expected
stock volatility
|
|
|
32.7
|
%
|
Risk-free
interest rate
|
|
|
3.46
|
%
|
Dividend
|
|
$
|
1.05
|
|
Rate
of dividend increase
|
|
|
4.63
|
%
|
Fair
value
|
|
$
|
9.70
|
|
Prior
to
2003, the Company had granted stock options for the purchase of its common
stock
to officers, certain key employees and directors under two stockholder-approved
plans. The 1995 Executive Incentive Compensation Plan authorizes the issuance
of
up to 4,000,000 shares of the Company's common stock for use in paying incentive
compensation awards in the form of stock options or other equity awards such
as
restricted stock, restricted stock units, or stock appreciation rights. The
1995
Non-Employee Directors' Stock Plan authorizes the issuance of up to 300,000
shares of the Company's common stock for equity awards.
Options
were granted at fair market value on the date of grant. Options issued in
2002
under the 1995 Executive Incentive Compensation Plan generally vest and become
exercisable commencing two years following the date of grant. Options issued
under the 1995 Non-Employee Directors’ Stock Plan become exercisable commencing
one year following the date of grant but vest immediately. The options under
both Plans expire ten years from the date of grant. Upon stockholder approval
of
these two plans in 1995, the Company terminated the use of the 1986 Stock
Option
Plan for granting of stock option awards. At December 31, 2005, there were
1,282,931 and 156,500 shares available for granting
equity
awards under the 1995 Executive Incentive Compensation Plan and the 1995
Non-Employee Directors' Stock Plan, respectively.
Changes
during 2005, 2004 and 2003 in stock options outstanding were as
follows:
|
|
Stock
Options
|
|
|
|
Shares
Under
Option
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2003
|
|
|
2,123,113
|
|
$
|
30.30
|
|
Granted
|
|
|
16,000
|
(a)
|
|
33.92
|
|
Exercised
|
|
|
(325,480
|
)
|
|
27.15
|
|
Terminated
and expired
|
|
|
(118,553
|
)
|
|
33.76
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2003
|
|
|
1,695,080
|
|
|
30.72
|
|
Granted
|
|
|
—
|
|
|
|
|
Exercised
|
|
|
(564,529
|
)
|
|
30.02
|
|
Terminated
and expired
|
|
|
(9,450
|
)
|
|
40.25
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2004
|
|
|
1,121,101
|
(b)
|
|
31.01
|
|
Granted
|
|
|
|
|
|
|
|
Exercised
|
|
|
(370,836
|
)
|
|
29.10
|
|
Terminated
and expired
|
|
|
(1,240
|
)
|
|
33.41
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2005
|
|
|
749,025
|
(c)
|
$
|
31.93
|
|
(a) |
During
2003, options were only granted to non-employee
directors.
|
(b) |
Included
in options outstanding at December 31, 2004 were 5,107 options
granted to
SGB key employees as part of the Company’s acquisition of SGB in 2000.
These options are not a part of the 1995 Executive Compensation
Plan, or
the 1995 Non-Employee Directors’ Stock
Plan.
|
(c) |
Included
in options outstanding at December 31, 2005 were 681 options granted
to
SGB key employees as part of the Company's acquisition of SGB in
2000.
These options are not a part of the 1995 Executive Compensation
Plan, or
the 1995 Non-Employee Directors' Stock
Plan.
|
Options
to purchase 731,705 shares, 1,098,831 shares and 1,187,938 shares were
exercisable at December 31, 2005, 2004 and 2003, respectively. The following
table summarizes information concerning outstanding and exercisable options
at
December 31, 2005.
|
|
Stock
Options Outstanding
|
|
Stock
Options Exercisable
|
Range
of
Exercisable
Prices
|
|
Number
Outstanding
|
|
Remaining
Contractual
Life
In
Years
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$25.63
- $29.00
|
|
|
263,852
|
|
|
4.27
|
|
$
|
27.49
|
|
|
254,892
|
|
$
|
27.56
|
|
29.31 - 32.65
|
|
|
272,005
|
|
|
5.99
|
|
|
32.53
|
|
|
272,005
|
|
|
32.53
|
|
32.81 - 46.16
|
|
|
213,168
|
|
|
2.60
|
|
|
36.67
|
|
|
204,808
|
|
|
36.72
|
|
|
|
|
749,025
|
|
|
|
|
|
|
|
|
731,705
|
|
|
|
|
13. Financial
Instruments
Off-Balance
Sheet Risk
As
collateral for the Company’s performance and to insurers, the Company is
contingently liable under standby letters of credit, bonds and bank guarantees
in the amount of $154.0 million and $239.1 million at December 31, 2005 and
2004, respectively. These standby letters of credit, bonds and bank guarantees
are generally in force for up to four years. Certain issues have no scheduled
expiration date. The Company pays fees to various banks and insurance
companies
that
range from 0.08 percent to 1.90 percent per annum of their face value. If
the
Company were required to obtain replacement standby letters of credit, bonds
and
bank guarantees as of December 31, 2005 for those currently outstanding,
it is
the Company's opinion that the replacement costs would not vary significantly
from the present fee structure.
The
Company has currency exposures in over 45 countries. The Company's primary
foreign currency exposures during 2005 were in Brazil, the United Kingdom,
Canada, Australia and members of the European Economic and Monetary Union
who
use the euro as their currency.
Off-Balance
Sheet Risk - Third Party Guarantees
In
connection with the licensing of one of the Company’s trade names and providing
certain management services (the furnishing of selected employees), the Company
guarantees the debt of certain third parties related to its international
operations. These guarantees are provided to enable the third parties to
obtain
financing of their operations. The Company receives fees from these operations,
which are included as Services sales in the Company’s Consolidated Statements of
Income. The revenue the Company recorded from these entities was $1.9 million,
$1.0 million and $1.5 million for the twelve months ended December 31, 2005,
2004 and 2003, respectively. The guarantees are renewed on an annual basis
and
the Company would only be required to perform under the guarantees if the
third
parties default on their debt. The maximum potential amount of future payments
(undiscounted) related to these guarantees was $2.9 million at December 31,
2005
and 2004. There is no recognition of this potential future payment in the
accompanying financial statements as the Company believes the potential for
making these payments is remote. These guarantees were renewed in June 2005,
September 2005 and November 2005.
The
Company provided an environmental indemnification for property that was sold
to
a third party in 2004. The term of this guarantee is seven years and the
Company
would only be required to perform under the guarantee if an environmental
matter
is discovered on the property relating to the time the Company owned the
property and was not known by the buyer at the date of sale. The Company
is not
aware of any environmental issues related to this property. The maximum
potential amount of future payments (undiscounted) related to this guarantee
is
$0.8 million at December 31, 2005 and 2004. There is no recognition of this
potential future payment in the accompanying financial statements as the
Company
believes the potential for making this payment is remote.
Every
three years, the Company requires a third party to review procedures and
record
keeping related to the production of certain products. Commencing in 2004,
the
Company provided an indemnification for any costs incurred by the third party
resulting from an injury while these services are being provided to the Company.
In addition, the Company provided an indemnification for certain costs resulting
from an outside claim against the third party. The indemnification is provided
for as long as the Company is producing products which meet the third party’s
specifications. At December 31, 2005 and 2004, the maximum potential amount
of
future payments (undiscounted) related to this guarantee is $3.0 million
per
occurrence. This amount represents the Company’s self-insured maximum
limitation. There is no specific recognition of this potential future payment
in
the accompanying financial statements as the Company is not aware of any
claims.
Prior
to
the Company’s acquisition of the business, Hünnebeck guaranteed certain third
party debt to leasing companies in connection with the sale of equipment.
The
guarantees expire on June 30, 2006, December 1, 2006 and December 1, 2008.
At
December 31, 2005, the maximum potential amount of future payments
(undiscounted) related to these guarantees was $0.3 million. The Company
would
only be required to perform under the guarantees if a customer defaulted
on the
lease payments. There is no recognition of these potential future payments
in
the accompanying financial statements as the Company believes the potential
for
making these payments is remote.
Liabilities
for the fair value of each of the guarantee instruments noted above were
recognized in accordance with FASB Interpretation No. 45, “Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others” (FIN 45). These liabilities are included
in Other current liabilities or Other liabilities (as appropriate) on the
Consolidated Balance Sheets. The recognition of these liabilities did not
have a
material impact on the Company’s financial condition or results of operations
for the twelve months ended December 31, 2005 or 2004.
In
the
normal course of business, the Company provides legal indemnifications related
primarily to the performance of its products and services and patent and
trademark infringement of its goods and services sold. These indemnifications
generally relate to the performance (regarding function, not price) of the
respective goods or services and therefore no liability is recognized related
to
the fair value of such guarantees.
Derivative
Instruments and Hedging Activities
The
Company has several hedges of net investment recorded in accordance with
SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(SFAS 133). The Company recorded a credit of $16.3 million and a debit
of
$8.5
million during 2005 and 2004, respectively, in the foreign currency translation
adjustments line of Other comprehensive income (loss) related to hedges of
net
investments.
At
December 31, 2005 and 2004, the Company had $157.9 million and $93.7 million
contracted amounts, respectively, of foreign currency forward exchange contracts
outstanding. These contracts are part of a worldwide program to minimize
foreign
currency exchange operating income and balance sheet exposure. The unsecured
contracts mature within twelve months and are with major financial institutions.
The Company may be exposed to credit loss in the event of non-performance
by the
other parties to the contracts. The Company evaluates the credit worthiness
of
the counterparties and does not expect default by them. Foreign currency
forward
exchange contracts are used to hedge commitments, such as foreign currency
debt,
firm purchase commitments and foreign currency cash flows for certain export
sales transactions.
The
following tables summarize by major currency the contractual amounts of the
Company's forward exchange contracts in U.S. dollars as of December 31, 2005
and
2004. The "Buy" amounts represent the U.S. dollar equivalent of commitments
to
purchase foreign currencies, and the "Sell" amounts represent the U.S. dollar
equivalent of commitments to sell foreign currencies.
Forward
Exchange Contracts
|
|
(In
thousands)
|
|
As
of December 31, 2005
|
|
|
|
Type
|
|
U.S.
Dollar
Equivalent
|
|
Maturity
|
|
Recognized
Gain
(Loss)
|
|
Euros
|
|
|
Buy
|
|
$
|
14,343
|
|
|
January
through June 2006
|
|
$
|
(211
|
)
|
Euros
|
|
|
Sell
|
|
|
1,987
|
|
|
January
2006
|
|
|
15
|
|
British
pounds sterling
|
|
|
Buy
|
|
|
75,743
|
|
|
January
2006
|
|
|
(1,334
|
)
|
British
pounds sterling
|
|
|
Sell
|
|
|
56,929
|
|
|
January
2006
|
|
|
436
|
|
Canadian
dollars
|
|
|
Buy
|
|
|
942
|
|
|
January
2006
|
|
|
5
|
|
Canadian
dollars
|
|
|
Sell
|
|
|
1,886
|
|
|
January
2006
|
|
|
15
|
|
Taiwan
dollars
|
|
|
Sell
|
|
|
6,088
|
|
|
August
through November 2006
|
|
|
—
|
|
Total
|
|
|
|
|
$
|
157,918
|
|
|
|
|
$
|
(1,074
|
)
|
At
December 31, 2005, the Company held forward exchange contracts in British
pounds
sterling, euros, Canadian dollars and Taiwan dollars which were used to offset
certain future payments between the Company and its various subsidiaries
or
vendors. These contracts all mature by November 2006. The Company had
outstanding forward contracts designated as SFAS 133 cash flow hedges in
the
amount of $6.1 million at December 31, 2005. These forward contracts had
a net
unrealized loss of $112 thousand that was included in Other comprehensive
income
(loss), net of deferred taxes, at December 31, 2005. The Company did not
elect
to treat the remaining contracts as hedges under SFAS 133 and so mark-to-market
gains and losses were recognized in net income.
Forward
Exchange Contracts
|
|
(In
thousands)
|
|
As
of December 31, 2004
|
|
|
|
Type
|
|
U.S.
Dollar
Equivalent
|
|
Maturity
|
|
Recognized
Gain
(Loss)
|
|
Euros
|
|
|
Buy
|
|
$
|
33,210
|
|
|
Through
February 2005
|
|
$
|
368
|
|
Euros
|
|
|
Sell
|
|
|
40,779
|
|
|
January
2005
|
|
|
(968
|
)
|
British
pounds sterling
|
|
|
Buy
|
|
|
7,287
|
|
|
January
2005
|
|
|
(195
|
)
|
Canadian
dollars
|
|
|
Buy
|
|
|
7,210
|
|
|
January
2005
|
|
|
178
|
|
Canadian
dollars
|
|
|
Sell
|
|
|
3,149
|
|
|
January
2005
|
|
|
(73
|
)
|
Australian
dollars
|
|
|
Buy
|
|
|
433
|
|
|
January
2005
|
|
|
14
|
|
Australian
dollars
|
|
|
Sell
|
|
|
1,629
|
|
|
Through
April 2005
|
|
|
(29
|
)
|
Total
|
|
|
|
|
$
|
93,697
|
|
|
|
|
$
|
(705
|
)
|
At
December 31, 2004, the Company held forward exchange contracts in British
pounds
sterling, euros, Canadian dollars and Australian dollars which were used
to
offset certain future payments between the Company and its various subsidiaries
or vendors. These contracts all matured by April 2005. The Company had an
outstanding forward contract designated as a SFAS 133 cash flow hedge in
the
amount of $587 thousand at December 31, 2004. This forward contract had an
unrealized gain of $67 thousand that was included in Other comprehensive
income
(loss), net of deferred taxes, at December 31, 2004. The Company did not
elect
to treat the remaining contracts as hedges under SFAS 133 and so mark-to-market
gains and losses were recognized in net income.
Concentrations
of Credit Risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and cash equivalents, investments and accounts
receivable. The Company places its cash and cash equivalents with high quality
financial institutions and, by policy, limits the amount of credit exposure
to
any one institution.
Concentrations
of credit risk with respect to accounts receivable are generally limited
due to
the Company’s large number of customers and their dispersion across different
industries and geographies. However, the Company’s Mill Services Segment has
several large customers throughout the world with significant accounts
receivable balances. In December 2005, the Company acquired BISNH. This
acquisition has increased the Company’s corresponding concentration of credit
risk to customers in the steel industry. Additionally, further consolidation
in
the global steel industry is possible. Should transactions occur involving
some
of the steel industry’s larger companies, which are customers of the Company, it
would result in an increase in concentration of credit risk for the Company.
As
part of its credit risk management practices, the Company is developing
strategies to mitigate this increased concentration of credit risk.
The
Company generally does not require collateral or other security to support
customer receivables. If a receivable from one or more of these customers
becomes uncollectible, it could have a material effect on the Company’s results
of operations and cash flows.
Fair
Value of Financial Instruments
The
major
methods and assumptions used in estimating the fair values of financial
instruments are as follows:
Cash
and cash equivalents
The
carrying amount approximates fair value due to the relatively short period
to
maturity of these instruments.
Foreign
currency forward exchange contracts
The
fair
value of foreign currency forward exchange contracts is estimated by obtaining
quotes from brokers.
Long-term
debt
The
fair
value of the Company's long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to
the
Company for debt of the same remaining maturities.
The
carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 2005 and 2004 are as follows:
|
|
Financial
Instruments
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
120,929
|
|
$
|
120,929
|
|
$
|
94,093
|
|
$
|
94,093
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt including current maturities
|
|
$
|
911,925
|
|
$
|
947,406
|
|
$
|
609,664
|
|
$
|
651,456
|
|
Foreign
currency forward exchange contracts
|
|
|
1,074
|
|
|
1,074
|
|
|
705
|
|
|
705
|
|
14. Information
by Segment and Geographic Area
The
Company reports information about its operating segments using the "management
approach" in accordance with SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (SFAS 131). This approach is based on the
way management organizes and reports the segments within the enterprise for
making operating decisions and assessing performance. The Company's reportable
segments are identified based upon differences in products, services and
markets
served. There were no significant inter-segment sales.
The
Company's Divisions are aggregated into three reportable segments and an
“all
other” category labeled Engineered Products and Services. Due to management
changes, effective January 1, 2004, the air-cooled heat exchangers business
was
reclassified from the Gas and Fluid Control Segment to the Other Infrastructure
Products and Services (“all other”) Category. In June 2004, the Company
announced a new identity for its Gas and Fluid Control Segment and renamed
it
Gas Technologies. Additionally, the Other Infrastructure Products and Services
(“all other”) Category was
renamed
the Engineered Products and Services (“all other”) Category. These segments and
the types of products and services offered include the following:
Mill
Services Segment
This
segment provides on-site, outsourced services to steel mills and other metal
producers such as aluminum. Services include slag processing; semi-finished
inventory management; material handling; scrap management; in-plant
transportation; and a variety of other services.
Access
Services Segment
Major
products and services include the rental and sale of scaffolding, shoring
and
concrete forming systems for non-residential construction and industrial
maintenance projects, and a variety of other access services including project
engineering and installation.
Products
and services are provided to the oil, chemical and petrochemical industries;
commercial and industrial construction contractors; public utilities; industrial
plants; and the infrastructure repair and maintenance markets.
Gas
Technologies
Major
products and services include tanks, cylinders and valves for the containment
and control of compressed gases.
Major
customers include various industrial markets and users of compressed gases;
the
hospital, life support, and refrigerant gas industries; welding distributors;
medical laboratories; beverage carbonation users; and the animal husbandry
industry.
Engineered
Products and Services (“all other”) Category
Major
products and services include railway track maintenance equipment and services;
industrial grating; air-cooled heat exchangers; granules for asphalt roofing
shingles and abrasives for industrial surface preparation derived from coal
slag; and boilers, water heaters and process equipment, including industrial
blenders, dryers and mixers.
Major
customers include private and government-owned railroads and urban mass transit
systems worldwide; industrial plants and the non-residential and institutional
construction and retrofit markets; the natural gas exploration and processing
industry; asphalt roofing manufacturers; and the chemical, food processing
and
pharmaceutical industries.
Other
Information
The
measurement basis of segment profit or loss is operating income. Sales of
the
Company in the United States and the United Kingdom exceeded 10% of consolidated
sales with 42% and 20%, respectively, in 2005; 42% and 21%, respectively,
in
2004; and 43% and 21%, respectively, in 2003. There are no significant
inter-segment sales.
No
single
customer represented 10% or more of the Company's sales during 2005, 2004
or
2003. However, the Mill Services Segment is dependent largely on the global
steel industry and in 2005, there were three customers that each provided
in
excess of 10% of this segment’s revenues under multiple long-term contracts at
several mill sites, compared with two such customers for the years 2004 and
2003. The loss of any one of the contracts would not have a material adverse
effect upon the Company’s financial position or cash flows; however, it could
have a material effect on quarterly or annual results of operations.
Additionally, these customers have significant accounts receivable balances.
In
December 2005, the Company acquired BISNH. This acquisition has increased
the
Company’s corresponding concentration of credit risk to these customers.
Further consolidation in the global steel industry is also possible.
Should transactions occur involving some of the steel industry’s larger
companies that are customers of the Company, it would result in an increase
in
concentration of credit risk for the Company.
Corporate
assets include principally cash, insurance receivables, prepaid pension costs
and United States deferred income taxes. Net Property, Plant and Equipment
in
the United States represents 33%, 34% and 35% of total Net Property, Plant
and
Equipment as of December 31, 2005, 2004 and 2003, respectively. Net Property,
Plant and Equipment in the United Kingdom represents 23% of total Net Property,
Plant and Equipment as of December 31, 2005, 2004 and 2003 and is disclosed
separately in the geographic area information.
Segment
Information
|
|
|
|
|
|
Twelve
Months Ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
December
31, 2003 (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Sales
|
|
Operating
Income
(Loss)
|
|
Sales
|
|
Operating
Income
(Loss)
|
|
Sales
|
|
Operating
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
Services Segment
|
|
$
|
1,060,354
|
|
$
|
109,591
|
|
$
|
997,410
|
|
$
|
105,490
|
|
$
|
827,521
|
|
$
|
85,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
Services Segment
|
|
|
788,750
|
|
|
74,742
|
|
|
706,490
|
|
|
44,464
|
|
|
619,069
|
|
|
37,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Technologies Segment
|
|
|
370,201
|
|
|
17,912
|
|
|
339,086
|
|
|
14,393
|
|
|
293,965
|
|
|
14,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Totals
|
|
|
2,219,305
|
|
|
202,245
|
|
|
2,042,986
|
|
|
164,347
|
|
|
1,740,555
|
|
|
137,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered
Products and Services (“all other”) Category
|
|
|
546,905
|
|
|
69,699
|
|
|
459,073
|
|
|
47,029
|
|
|
377,961
|
|
|
36,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate
|
|
|
—
|
|
|
(2,996
|
)
|
|
|
|
|
(1,527
|
)
|
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Totals
|
|
$
|
2,766,210
|
|
$
|
268,948
|
|
$
|
2,502,059
|
|
$
|
209,849
|
|
$
|
2,118,516
|
|
$
|
173,892
|
|
(a) |
Segment
information for 2003 has been reclassified to conform with the
current
presentation.
|
Reconciliation
of Segment Operating Income to Consolidated Income
Before
Income Taxes and Minority Interest
|
|
|
|
Twelve
Months Ended
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
December
31 2005
|
|
December
31 2004
|
|
December
31 2003 (a)
|
|
|
|
|
|
|
|
|
|
Segment
operating income
|
|
$
|
202,245
|
|
$
|
164,347
|
|
$
|
137,806
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered
Products and Services (“all
other”) Category
|
|
|
69,699
|
|
|
47,029
|
|
|
36,474
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate Expense
|
|
|
(2,996
|
)
|
|
(1,527
|
)
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
268,948
|
|
|
209,849
|
|
|
173,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated entities, net
|
|
|
74
|
|
|
128
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
3,165
|
|
|
2,319
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(41,918
|
)
|
|
(41,057
|
)
|
|
(40,513
|
)
|
Income
from continuing operations before income taxes and minority
interest
|
|
$
|
230,269
|
|
$
|
171,239
|
|
$
|
135,902
|
|
(a)
|
Segment
information for 2003 has been reclassified to conform with the
current
presentation.
|
Segment
Information
|
|
|
|
|
|
|
|
Assets
(a)
|
|
Depreciation
and
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
(b)
|
|
2005
|
|
2004
|
|
2003
(b)
|
|
Mill
Services Segment
|
|
$
|
1,273,522
|
|
$
|
985,538
|
|
$
|
898,057
|
|
$
|
114,952
|
|
$
|
107,682
|
|
$
|
96,906
|
|
Access
Services Segment
|
|
|
976,936
|
|
|
763,916
|
|
|
696,226
|
|
|
53,263
|
|
|
48,005
|
|
|
41,665
|
|
Gas
Technologies Segment
|
|
|
253,276
|
|
|
257,233
|
|
|
239,500
|
|
|
12,610
|
|
|
12,735
|
|
|
13,086
|
|
Segment
Totals
|
|
|
2,503,734
|
|
|
2,006,687
|
|
|
1,833,783
|
|
|
180,825
|
|
|
168,422
|
|
|
151,657
|
|
Engineered
Products and Services (“all other”) Category
|
|
|
315,241
|
|
|
274,627
|
|
|
215,663
|
|
|
15,735
|
|
|
14,675
|
|
|
15,918
|
|
Corporate
|
|
|
156,829
|
|
|
108,442
|
|
|
88,589
|
|
|
1,505
|
|
|
1,274
|
|
|
1,360
|
|
Total
|
|
$
|
2,975,804
|
|
$
|
2,389,756
|
|
$
|
2,138,035
|
|
$
|
198,065
|
|
$
|
184,371
|
|
$
|
168,935
|
|
(a) |
Assets
from discontinued operations of $0.4 million, $0.5 million and
$1.0
million in 2005, 2004 and 2003, respectively, are included in
the Gas
Technologies Segment.
|
(b)
|
Segment
information for 2003 has been reclassified to conform with the
current
presentation.
|
Capital
Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
(a)
|
|
Mill
Services Segment
|
|
$
|
155,595
|
|
$
|
120,890
|
|
$
|
88,132
|
|
Access
Services Segment
|
|
|
86,668
|
|
|
50,439
|
|
|
41,214
|
|
Gas
Technologies Segment
|
|
|
6,438
|
|
|
8,958
|
|
|
7,837
|
|
Segment
Totals
|
|
|
248,701
|
|
|
180,287
|
|
|
137,183
|
|
Engineered
Products and Services (“all other”) Category
|
|
|
39,834
|
|
|
22,585
|
|
|
6,274
|
|
Corporate
|
|
|
1,704
|
|
|
1,363
|
|
|
367
|
|
Total
|
|
$
|
290,239
|
|
$
|
204,235
|
|
$
|
143,824
|
|
(a)
|
Segment
information for 2003 has been reclassified to conform with the
current
presentation.
|
Information
by Geographic Area (a)
|
|
|
|
|
|
Sales
to Unaffiliated Customers
|
|
Net
Property, Plant and Equipment
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
Geographic
Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,157,034
|
|
$
|
1,047,416
|
|
$
|
902,400
|
|
$
|
371,039
|
|
$
|
313,391
|
|
$
|
306,997
|
|
United
Kingdom
|
|
|
546,673
|
|
|
534,097
|
|
|
453,388
|
|
|
258,786
|
|
|
218,127
|
|
|
199,631
|
|
All
Other
|
|
|
1,062,503
|
|
|
920,546
|
|
|
762,728
|
|
|
509,983
|
|
|
400,780
|
|
|
358,815
|
|
Totals
excluding Corporate
|
|
$
|
2,766,210
|
|
$
|
2,502,059
|
|
$
|
2,118,516
|
|
$
|
1,139,808
|
|
$
|
932,298
|
|
$
|
865,443
|
|
(a) |
Revenues
are attributed to individual countries based on the location of
the
facility generating the revenue.
|
Information
about Products and Services
|
|
|
|
|
|
Sales
to Unaffiliated Customers
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Product
Group
|
|
|
|
|
|
|
|
Mill
services
|
|
$
|
1,060,354
|
|
$
|
997,410
|
|
$
|
827,521
|
|
Access
services
|
|
|
788,750
|
|
|
706,490
|
|
|
619,069
|
|
Industrial
gas products
|
|
|
370,201
|
|
|
339,086
|
|
|
293,965
|
|
Railway
track maintenance services and equipment
|
|
|
247,452
|
|
|
209,765
|
|
|
173,050
|
|
Industrial
grating products
|
|
|
98,845
|
|
|
85,609
|
|
|
66,248
|
|
Industrial
abrasives and roofing granules
|
|
|
72,216
|
|
|
70,863
|
|
|
68,896
|
|
Heat
exchangers
|
|
|
92,339
|
|
|
60,103
|
|
|
41,161
|
|
Powder
processing equipment and heat transfer products
|
|
|
36,053
|
|
|
32,733
|
|
|
28,606
|
|
Consolidated
Sales
|
|
$
|
2,766,210
|
|
$
|
2,502,059
|
|
$
|
2,118,516
|
|
15. Other
(Income) and Expenses
In
the
years 2005, 2004 and 2003, the Company recorded pre-tax Other (income) and
expenses from continuing operations of $2.0 million, $4.9 million and $7.0
million, respectively. The major components of this income statement category
are as follows:
|
|
Other
(Income) and Expenses
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Net
gains
|
|
$
|
(9,674
|
)
|
$
|
(1,524
|
)
|
$
|
(3,543
|
)
|
Impaired
asset write-downs
|
|
|
579
|
|
|
484
|
|
|
168
|
|
Employee
termination benefit costs
|
|
|
9,060
|
|
|
3,892
|
|
|
6,064
|
|
Costs
to exit activities
|
|
|
1,028
|
|
|
975
|
|
|
2,725
|
|
Other
expense
|
|
|
1,007
|
|
|
1,035
|
|
|
1,541
|
|
Total
|
|
$
|
2,000
|
|
$
|
4,862
|
|
$
|
6,955
|
|
Net
Gains
Net
gains
are recorded from the sales of redundant properties (primarily land, buildings
and related equipment) and non-core assets. Most of these gains related to
assets in the United States and Europe.
|
|
Net
Gains
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Mill
Services Segment
|
|
$
|
(4,202
|
)
|
$
|
(354
|
)
|
$
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Access
Services Segment
|
|
|
(5,413
|
)
|
|
(1,124
|
)
|
|
(2,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Technologies Segment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered
Products and Services (“all other”) Category
|
|
|
(59
|
)
|
|
(46
|
)
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9,674
|
)
|
$
|
(1,524
|
)
|
$
|
(3,543
|
)
|
Cash
proceeds associated with these gains are included in Proceeds from the sale
of
assets in the investing activities section of the Consolidated Statements
of
Cash Flows.
Impaired
Asset Write-downs
Impairment
losses are measured as the amount by which the carrying amount of assets
exceeded their fair value. Fair value is estimated based upon the expected
future realizable cash flows including anticipated selling prices.
Non-cash
impaired asset write-downs are included in Other, net in the Consolidated
Statements of Cash Flows as adjustments to reconcile net income to net cash
provided by operating activities.
Employee
Termination Benefit Costs
The
Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities,” (SFAS 146) on January 1, 2003. This standard addresses
involuntary termination costs associated with one-time benefit arrangements
provided as part of an exit or disposal activity. These costs and the related
liabilities are recognized by the Company when a formal plan for reorganization
is approved at the appropriate level of management and communicated to the
affected employees. Additionally, costs associated with on-going benefit
arrangements, or in certain countries where statutory requirements dictate
a
minimum required benefit, are recognized when they are probable and estimable,
in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment
Benefits,” (SFAS 112).
The
total
amount of employee termination benefit costs incurred for the years 2005,
2004
and 2003 was as follows. None of the actions are expected to incur any
additional costs.
|
|
Employee
Termination Benefit Costs
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Mill
Services Segment
|
|
$
|
4,827
|
|
$
|
1,338
|
|
$
|
3,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
Services Segment
|
|
|
1,647
|
|
|
1,504
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Technologies Segment
|
|
|
107
|
|
|
229
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered
Products and Services (“all other”) Category
|
|
|
1,256
|
|
|
685
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,223
|
|
|
136
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,060
|
|
$
|
3,892
|
|
$
|
6,064
|
|
The
terminations for the years 2003 to 2005 occurred principally in Europe and
the
United States.
The
following table summarizes employee termination benefit costs and payments
(associated with continuing operations) related to reorganization actions
initiated prior to January 1, 2006:
|
|
Original
reorganization action period
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Employee
termination benefits expense
|
|
$
|
9,060
|
|
$
|
3,892
|
|
$
|
6,064
|
|
$
|
7,140
|
|
Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
2002
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,438
|
)
|
In
2003
|
|
|
—
|
|
|
—
|
|
|
(3,838
|
)
|
|
(2,627
|
)
|
In
2004
|
|
|
—
|
|
|
(2,178
|
)
|
|
(1,859
|
)
|
|
(52
|
)
|
In
2005
|
|
|
(3,826
|
)
|
|
(1,282
|
)
|
|
(310
|
)
|
|
(60
|
)
|
Total
payments:
|
|
|
(3,826
|
)
|
|
(3,460
|
)
|
|
(6,007
|
)
|
|
(7,177
|
)
|
Other:
|
|
|
(33
|
)
|
|
(52
|
)
|
|
53
|
|
|
42
|
|
Remaining
payments as of December 31, 2005
|
|
$
|
5,201
|
|
$
|
380
|
|
$
|
110
|
|
$
|
5
|
|
The
payments for employee termination benefit costs are reflected as uses of
operating cash in the Consolidated Statements of Cash Flows.
Costs
Associated with Exit or Disposal Activities
Costs
associated with exit or disposal activities are recognized in accordance
with
SFAS 146 and are included as a component of Other expenses in the Company’s
Consolidated Statements of Income. SFAS 146 addresses involuntary termination
costs (as discussed above) and other costs associated with exit or disposal
activities (exit costs). Costs to
terminate
a contract that is not a capital lease are recognized when an entity terminates
the contract or when an entity ceases using the right conveyed by the contract.
This includes the costs to terminate the contract before the end of its term
or
the costs that will continue to be incurred under the contract for its remaining
term without economic benefit to the entity (e.g., lease run-out costs).
Other
costs associated with exit or disposal activities (e.g., costs to consolidate
or
close facilities and relocate equipment or employees) are recognized and
measured at their fair value in the period in which the liability is incurred.
In 2005, $1.0 million of exit costs were incurred. These were principally
relocation costs and lease run-out costs for the Engineered Products and
Services Category and the Mill Services and Access Services Segments.
In
2004,
2003 and 2002, exit costs incurred were $1.0 million, $2.7 million and $1.9
million, respectively. These were principally lease run-out costs, lease
termination costs and relocation costs for mainly the Mill Services and Access
Services Segments.
(Unaudited)
(In
millions, except per share amounts)
|
|
2005
|
|
Quarterly
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Sales
|
|
$
|
640.1
|
|
$
|
696.1
|
|
$
|
697.5
|
|
$
|
732.5
|
|
Gross
profit (a)
|
|
|
146.4
|
|
|
169.8
|
|
|
164.8
|
|
|
185.7
|
|
Net
income
|
|
|
23.1
|
|
|
41.7
|
|
|
40.0
|
|
|
51.9
|
|
Basic
earnings per share
|
|
|
0.56
|
|
|
1.00
|
|
|
0.96
|
|
|
1.24
|
|
Diluted
earnings per share
|
|
|
0.55
|
|
|
0.99
|
|
|
0.95
|
|
|
1.23
|
|
(In
millions, except per share amounts)
|
|
2004
|
|
Quarterly
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Sales
|
|
$
|
556.3
|
|
$
|
617.6
|
|
$
|
617.3
|
|
$
|
710.9
|
|
Gross
profit (a)
|
|
|
127.3
|
|
|
149.7
|
|
|
146.5
|
|
|
162.1
|
|
Net
income
|
|
|
16.9
|
|
|
30.7
|
|
|
38.6
|
|
|
35.0
|
|
Basic
earnings per share
|
|
|
0.41
|
|
|
0.75
|
|
|
0.94
|
|
|
0.85
|
|
Diluted
earnings per share
|
|
|
0.41
|
|
|
0.74
|
|
|
0.93
|
|
|
0.84
|
|
(a) |
Gross
profit is defined as Sales less costs and expenses associated directly
with or allocated to products sold or services
rendered.
|
(Unaudited)
|
|
Market
Price Per Share
|
|
Dividends
Declared
|
|
|
|
High
|
|
Low
|
|
Per
Share
|
|
2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
61.35
|
|
$
|
49.87
|
|
$
|
0.3000
|
|
Second
Quarter
|
|
|
61.10
|
|
|
52.37
|
|
|
0.3000
|
|
Third
Quarter
|
|
|
66.20
|
|
|
53.56
|
|
|
0.3000
|
|
Fourth
Quarter
|
|
|
70.57
|
|
|
59.70
|
|
|
0.3250
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
48.78
|
|
$
|
43.00
|
|
$
|
0.2750
|
|
Second
Quarter
|
|
|
47.00
|
|
|
40.10
|
|
|
0.2750
|
|
Third
Quarter
|
|
|
47.35
|
|
|
41.87
|
|
|
0.2750
|
|
Fourth
Quarter
|
|
|
56.24
|
|
|
44.55
|
|
|
0.3000
|
|
Item
9.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosures
|
None.
Item
9A. |
Controls
and Procedures
|
The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, has conducted an evaluation of the effectiveness of disclosure controls
and procedures as of December 31, 2005. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective. There have been no changes in internal
control over financial reporting that could materially affect, or are likely
to
materially affect, internal control over financial reporting.
Management’s
Report on Internal Controls Over Financial Reporting is included in Part
II,
Item 8, “Financial Statements and Supplementary Data.” Management’s assessment
of the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
appearing in Part II, Item 8, “Financial Statements and Supplementary Data,”
which expresses unqualified opinions on management’s assessment and on the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2005.
Item
9B.
|
Other
Information
|
10b5-1
Plan
The
Chief
Executive Officer (CEO) of the Company adopted, in the Fourth Quarter of
2004, a
personal trading plan as part of a long-term strategy for asset diversification
and liquidity, in accordance with the Securities and Exchange Commission’s Rule
10b5-1. Under the plan, the CEO planned to exercise, under pre-arranged terms,
up to 167,500 options in open market transactions. The 167,500 options
represented approximately 38% of his total option holdings at the time the
trading plan was initiated. The trading plan expired in December 2005. As
of the
expiration of the trading plan, all 167,500 shares had been sold.
The
CEO
and the President and Chief Financial Officer (CFO) of the Company plan to
adopt, in the First Quarter of 2006, new personal trading plans as part of
a
long-term strategy for asset diversification and liquidity, in accordance
with
the Securities and Exchange Commission’s Rule 10b5-1. Under the proposed plan,
the CEO will exercise 100,000 shares and the President and CFO will exercise
28,000 shares, under pre-arranged terms, in open market transactions. The
proposed trading plans will expire in July 2006.
Rule
10b5-1 allows officers and directors, at a time when they are not in possession
of material non-public information, to adopt written plans to sell shares
on a
regular basis under pre-arranged terms, regardless of any subsequent non-public
information they may receive. Exercises of stock options by the CEO and/or
President pursuant to the terms of their respective plans will be disclosed
publicly through Form 144 and Form 4 filings with the Securities and Exchange
Commission.
PART
III
Information
regarding executive officers required by this Item is set forth as a
Supplementary Item at the end of Part I hereof (pursuant to Instruction 3
to
Item 401(b) of Regulation S-K). Other information required by this Item is
incorporated by reference to the sections entitled “Director Information,”
“Report of the Audit Committee” and “Section 16(a) Beneficial Ownership
Reporting Compliance” of the 2006 Proxy Statement.
The
Company’s Code of Ethics for the Chief Executive Officer and Senior Financial
Officers (the “Code”) may be found on the Company’s internet website,
www.harsco.com.
The
Company intends to disclose on the website any amendments to the Code or
any
waiver from a provision of the Code. The Code is available in print to any
stockholder who requests it.
Information
regarding compensation of executive officers and directors is incorporated
by
reference to the sections entitled “Management Development and Compensation
Committee Report on Executive Compensation”; "Executive Compensation and Other
Information"; “Stock Options”; “Options Exercises and Holdings”; “Stock
Performance Graph”; “Retirement Plans”; “Employment Agreements with Officers of
the Company”; and "Directors' Compensation" of the 2006 Proxy
Statement.
Information
regarding security ownership of certain beneficial owners and management
is
incorporated by reference to the section entitled “Share Ownership of Directors,
Management and Certain Beneficial Owners” of the 2006 Proxy
Statement.
Equity
Compensation Plan Information
The
Company maintains the 1995 Executive Incentive Compensation Plan and the
1995
Non-Employee Directors’ Stock Plan, which allow the Company to grant equity
awards to eligible persons. Upon stockholder approval of these two plans
in
1995, the Company terminated the use of the 1986 Stock Option Plan for granting
stock option awards.
The
Company also assumed options under the SGB Group Plc Discretionary Share
Option
Plan 1997 (the “SGB Plan”) upon the Company’s acquisition of SGB Group Plc
(“SGB”) in 2000. At the time of the acquisition, various employees of the
U.K.-based SGB held previously granted stock options under the SGB Plan.
The
Company authorized the issuance of Harsco common stock to fulfill these SGB
Plan
stock options upon exercise from time to time. The Company has not made any
additional stock option grants under the SGB Plan since the acquisition and
will
not make any further grants in the future.
The
following table gives information about equity awards under these plans as
of
December 31, 2005. All securities referred to are shares of Harsco common
stock.
|
Equity
Compensation Plan Information
|
|
|
Column
(a)
|
Column
(b)
|
Column
(c)
|
|
Plan
category
|
Number
of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price
of outstanding
options,
warrants and
rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in Column (a))
|
|
Equity
compensation plans approved by security holders (1)
|
748,344
|
$31.93
|
1,439,431
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
681 (2)
|
35.99 (3)
|
—
|
|
Total
|
749,025
|
$31.93
|
1,439,431
|
(1) |
Plans
include the 1995 Executive Incentive Compensation Plan, as amended,
and
the 1995 Non-Employee Directors’ Stock Plan, as amended.
|
(2) |
Represents
the shares of Harsco common stock issuable as replacement option
shares in
satisfaction of the exercise of stock options granted by SGB under
the SGB
Plan as described below. This plan is not a material equity compensation
plan of the Company.
|
(3) |
These
stock options denominate the exercise price in British pounds sterling.
The price shown is translated into U. S. dollars at an exchange
rate of
$1.7205 effective December 31,
2005.
|
Description
of the Equity Compensation Plan Not Approved by Security
Holders
The
SGB
Group Plc Discretionary Share Option Plan 1997
Upon
the
acquisition of SGB in June 2000, the Company authorized the assumption of
outstanding options granted under the SGB Plan and the issuance of options
(“Harsco Replacement Options”) exercisable for shares of Harsco common stock in
exchange for options granted by SGB pursuant to the SGB Plan and exercisable
for
shares of SGB common stock (“SGB Options”). On June 30, 2000, the Company
commenced an offer (“Option Exchange Offer”) to the holders of SGB Options for
an equivalent Harsco Replacement Option. Upon completion of the Option Exchange
Offer, each SGB Option exercisable for one SGB share was exchanged for a
Harsco
Replacement Option exercisable for a fraction, equal to 0.1362, of one share
of
Harsco common stock. The Company has authorized the issuance of Harsco common
stock from treasury or from authorized but unissued shares as necessary to
fulfill the terms of the Harsco Replacement Options. The maximum number of
shares of Harsco common stock that were issuable upon exercise of the Harsco
Replacement Options was 61,097. Only those SGB participants who accepted
the
Option Exchange Offer and received Harsco Replacement Options were eligible
to
continue participation in the SGB Plan. SGB Options were granted under the
Plan
on five different dates prior to the acquisition. The exercise prices of
the
Harsco Replacement Options varied depending on the original SGB Option date
of
grant and ranged from 11.45 British pounds sterling to 20.92 British pounds
sterling. All Harsco Replacement Options currently outstanding have an exercise
price of 20.92 British pounds sterling. The options are exercisable during
the
period commencing on the third anniversary of the date the original SGB Options
were granted and ending on the day before the tenth anniversary of the date
the
SGB Options were granted. If a participant ceases to be an Eligible Employee
(as
defined under the Plan), the participant’s Harsco Replacement Options will
lapse, except in the event that the participant ceases to be an Eligible
Employee due to death or injury, disability, redundancy or
retirement.
Information
regarding certain relationships and related transactions is incorporated
by
reference to the section entitled "Employment Agreements with Officers of
the
Company" of the 2006 Proxy Statement.
Item
14. Principal
Accountant Fees and Services
Information
regarding principal accounting fees and services is incorporated by reference
to
the section entitled “Fees Billed by the Accountants for Audit and Non-Audit
Services” of the 2006 Proxy Statement.
PART
IV
|
(a)
1. |
The
Consolidated Financial Statements are listed in the index to Item
8,
"Financial Statements and Supplementary Data," on page
45.
|
|
(a)
2. |
The
following financial statement schedule should be read in conjunction
with
the Consolidated Financial Statements (see Item 8, “Financial Statements
and Supplementary Data”):
|
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
47
|
|
|
Schedule
II - Valuation and Qualifying Accounts for the years 2005, 2004
and 2003
|
93
|
Schedules
other than that listed above are omitted for the reason that they are either
not
applicable or not required, or because the information required is contained
in
the financial statements or notes thereto.
Condensed
financial information of the registrant is omitted since "restricted net
assets"
of consolidated subsidiaries does not exceed 25% of consolidated net
assets.
Financial
statements of 50% or less owned unconsolidated companies are not submitted
inasmuch as (1) the registrant's investment in and advances to such companies
do
not exceed 20% of the total consolidated assets, (2) the registrant's
proportionate share of the total assets of such companies does not exceed
20% of
the total consolidated assets, and (3) the registrant's equity in the income
from continuing operations before income taxes of such companies does not
exceed
20% of the total consolidated income from continuing operations before income
taxes.
Continuing
Operations
(Dollars
in thousands)
COLUMN
A
|
|
COLUMN
B
|
|
COLUMN
C
Additions
|
|
COLUMN
D
(Deductions) Additions
|
|
COLUMN
E
|
|
Description
|
|
Balance
at
Beginning
of
Period
|
|
Charged
to
Cost
and
Expenses
|
|
Due
to
Currency
Translation
Adjustments
|
|
Other
(a)
|
|
Balance
at
End
of Period
|
|
For
the year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from receivables:
|
|
|
|
|
|
|
|
|
|
|
|
Uncollectible
accounts
|
|
$
|
19,095
|
|
$
|
6,453
|
|
$
|
(832
|
)
|
$
|
(312
|
)
|
$
|
24,404
|
|
Deducted
from inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
valuations
|
|
$
|
5,058
|
|
$
|
8,736
|
|
$
|
(427
|
)
|
$
|
4,015
|
|
$
|
17,382
|
|
Other
reorganization and
valuation
reserves
|
|
$
|
5,239
|
|
$
|
9,081
|
|
$
|
(380
|
)
|
$
|
(1,811
|
)
|
$
|
12,129
|
|
For
the year 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncollectible
accounts
|
|
$
|
24,612
|
|
$
|
5,048
|
|
$
|
863
|
|
$
|
(11,428(b
|
))
|
$
|
19,095
|
|
Deducted
from inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
valuations
|
|
$
|
5,950
|
|
$
|
2,849
|
|
$
|
343
|
|
$
|
(4,084
|
)
|
$
|
5,058
|
|
Other
reorganization and
valuation
reserves
|
|
$
|
6,692
|
|
$
|
4,811
|
|
$
|
283
|
|
$
|
(6,547
|
)
|
$
|
5,239
|
|
For
the year 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncollectible
accounts
|
|
$
|
36,483
|
|
$
|
3,389
|
|
$
|
1,609
|
|
$
|
(16,869(c
|
))
|
$
|
24,612
|
|
Deducted
from inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
valuations
|
|
$
|
4,541
|
|
$
|
2,775
|
|
$
|
535
|
|
$
|
(1,901
|
)
|
$
|
5,950
|
|
Other
reorganization and
valuation
reserves
|
|
$
|
8,373
|
|
$
|
7,409
|
|
$
|
643
|
|
$
|
(9,733
|
)
|
$
|
6,692
|
|
(a) |
Includes
principally the use of previously reserved amounts and changes
related to
acquired companies.
|
(b) |
Includes
$5,322 for the write-off of six accounts receivable in the Mill
Services
Segment as well as the write-off of other accounts receivable for
all
segments.
|
(c) |
Includes
$6,276 for the write-off of two accounts receivable in the Mill
Services
Segment as well as the write-off of other accounts receivable for
all
segments.
|
(a) 3. Listing
of Exhibits Filed with Form 10-K
Exhibit
Number
|
Data
Required
|
|
Location
in Form 10-K
|
2(a)
|
Share
Purchase Agreement between Sun HB Holdings, LLC, Boca Raton,
Florida,
United States of America and Harsco Corporation, Camp Hill, Pennsylvania,
United States of America dated September 20, 2005 regarding the
sale and
purchase of the issued share capital of Hünnebeck Group GmbH, Ratingen,
Germany.
|
|
Exhibit
to Form 10-Q for the period ended September 30, 2005
|
2(b)
|
Agreement,
dated as of December 29, 2005, by and among the Harsco Corporation
(for
itself and as agent for each of MultiServ France SA, Harsco Europa
BV and
Harsco Investment Limited), Brambles U.K. Limited, a company
incorporated
under the laws of England and Wales, Brambles France SAS, a company
incorporated under the laws of France, Brambles USA, Inc., a
Delaware
corporation, Brambles Holdings Europe B.V., a company incorporated
under
the laws of the Netherlands, and Brambles Industries Limited,
a company
incorporated under the laws of Australia. In accordance with
Item
601(b)(2) of Regulation S-K, the registrant hereby agrees to
furnish
supplementally a copy of any omitted schedule to the Commission
upon
request. Portions of Exhibit 2(a) have been omitted pursuant
to a request
for confidential treatment. The omitted portions have been filed
separately with the Securities and Exchange Commission.
|
|
Exhibit
volume, 2005 10-K
|
3(a)
|
Articles
of Incorporation as amended April 24, 1990
|
|
Exhibit
volume, 1990 10-K
|
3(b)
|
Certificate
of Amendment of Articles of Incorporation filed June 3, 1997
|
|
Exhibit
volume, 1999 10-K
|
3(c)
|
Certificate
of Designation filed September 25, 1997
|
|
Exhibit
volume, 1997 10-K
|
3(d)
|
By-laws
as amended April 25, 1990
|
|
Exhibit
volume, 1990 10-K
|
4(a)
|
Harsco
Corporation Rights Agreement dated as of September 28, 1997,
with Chase
Mellon Shareholder Services L.L.C.
|
|
Incorporated
by reference to Form 8-A, filed September 26, 1997
|
4(b)
|
Registration
of Preferred Stock Purchase Rights
|
|
Incorporated
by reference to Form 8-A dated October 2, 1987
|
4(c)
|
Current
Report on dividend distribution of Preferred Stock Purchase
Rights
|
|
Incorporated
by reference to Form 8-K dated October 13, 1987
|
Exhibit
Number
|
Data
Required
|
|
Location
in Form 10-K
|
4(f)
|
Debt
and Equity Securities Registered
|
|
Incorporated
by reference to Form S-3, Registration No. 33-56885 dated December
15,
1994, effective date January 12, 1995
|
4(g)
|
Harsco
Finance B. V. £200 million, 7.25% Guaranteed Notes due 2010
|
|
Exhibit
to Form 10-Q for the period ended September 30, 2000
|
4(h)
(i)
|
Indenture,
dated as of May 1, 1985, by and between Harsco Corporation and
The Chase
Manhattan Bank (National Association), as trustee (incorporated
herein by
reference to Exhibit 4(d) to the Registration Statement on Form
S-3, filed
by Harsco Corporation on August 23, 1991 (Reg. No. 33-42389))
|
|
Exhibit
to Form 8-K dated September 8, 2003
|
4(h)
(ii)
|
First
Supplemental Indenture, dated as of April 12, 1995, by and among
Harsco
Corporation, The Chase Manhattan Bank (National Association),
as resigning
trustee, and Chemical Bank, as successor trustee
|
|
Exhibit
to Form 8-K dated September 8, 2003
|
4(h)
(iii)
|
Form
of Second Supplemental Indenture, by and between Harsco Corporation
and
JPMorgan Chase Bank, as Trustee
|
|
Exhibit
to Form 8-K dated September 8, 2003
|
4(h)
(iv)
|
Second
Supplemental Indenture, dated as of September 12, 2003, by and
between Harsco Corporation and J.P. Morgan Chase Bank, as
Trustee
|
|
Exhibit
to 10-Q for the period ended September 30, 2003
|
4(i)
(i)
|
Form
of 5.125% Global Senior Note due September 15, 2013
|
|
Exhibit
to Form 8-K dated September 8, 2003
|
4(i)
(ii)
|
5.125%
2003 Notes due September 15, 2013 described in Prospectus Supplement
dated
September 8, 2003 to Form S-3 Registration under Rule 415 dated
December 15, 1994
|
|
Incorporated
by reference to the Prospectus Supplement dated September 8,
2003 to Form
S-3, Registration No. 33-56885 dated December 15, 1994
|
Material
Contracts - Credit and Underwriting Agreements
|
|
10(a)
(i)
|
$50,000,000
Facility agreement dated December 15, 2000
|
|
Exhibit
volume, 2000 10-K
|
10(a)
(ii)
|
Agreement
extending term of $50,000,000 Facility agreement dated December
15,
2000
|
|
Exhibit
volume, 2001 10-K
|
10(a)
(iii)
|
Agreement
amending term and amount of $50,000,000 Facility agreement
dated December
15, 2000
|
|
Exhibit
volume, 2002 10-K
|
10(a)
(iv)
|
Agreement
extending term of $50,000,000 Facility agreement dated December
15,
2000
|
|
Exhibit
volume, 2003 10-K
|
Exhibit
Number
|
Data
Required
|
|
Location
in Form 10-K
|
10(a)
(v)
|
Agreement
extending term of $50,000,000 Facility agreement dated December
15,
2000
|
|
Exhibit
to Form 8-K dated January 25, 2005
|
10(a)
(vi)
|
Agreement
extending term of $50,000,000 Facility agreement dated December
15,
2000
|
|
Exhibit
volume, 2005 10-K
|
10(b)
|
Commercial
Paper Dealer Agreement dated September 24, 2003, between ING
Belgium SA/NV
and Harsco Finance B.V.
|
|
Exhibit
volume, 2003 10-K
|
10(b)(i)
|
Commercial
Paper Dealer Agreement dated September 24, 2003, between ING
Belgium SA/NV
and Harsco Finance B.V. - Supplement No. 1 to the Dealer
Agreement
|
|
Exhibit
to Form 8-K dated November 8, 2005
|
10(c)
|
Commercial
Paper Payment Agency Agreement Dated October 1, 2000, between
Salomon
Smith Barney Inc. and Harsco Corporation
|
|
Exhibit
volume, 2000 10-K
|
10(e)
|
Issuing
and Paying Agency Agreement, Dated October 12, 1994, between
Morgan
Guaranty Trust Company of New York and Harsco
Corporation
|
|
Exhibit
volume, 1994 10-K
|
10(f)
|
364-Day
Credit Agreement
|
|
Exhibit
to Form 8-K dated December 23, 2005
|
10(g)
|
Five
Year Credit Agreement
|
|
Exhibit
to Form 8-K dated November 23, 2005
|
10(i)
|
Commercial
Paper Dealer Agreement dated June 7, 2001, between Citibank
International
plc, National Westminster Bank plc, The Royal Bank of Scotland
plc and
Harsco Finance B.V.
|
|
Exhibit
to 10-Q for the period ended
June
30, 2001
|
10(j)
|
Commercial
Paper Placement Agency Agreement dated November 6, 1998, between
Chase
Securities, Inc. and Harsco Corporation
|
|
Exhibit
volume, 1998 10-K
|
Material
Contracts - Management Contracts and Compensatory
Plans
|
10(d)
|
Form
of Change in Control Severance Agreement (Chairman, President
and CEO and
Senior Vice Presidents)
|
|
Exhibit
to Form 8-K dated June 21, 2005
|
10(k)
|
Harsco
Corporation Supplemental Retirement Benefit Plan as amended
October 4,
2002
|
|
Exhibit
volume, 2002 10-K
|
Exhibit
Number
|
Data
Required
|
|
Location
in Form 10-K
|
10(l)
|
Trust
Agreement between Harsco Corporation and Dauphin Deposit Bank
and Trust
Company dated July 1, 1987 relating to the Supplemental Retirement
Benefit
Plan
|
|
Exhibit
volume, 1987 10-K
|
10(m)
|
Harsco
Corporation Supplemental Executive Retirement Plan as amended
|
|
Exhibit
volume, 1991 10-K
|
10(n)
|
Trust
Agreement between Harsco Corporation and Dauphin Deposit Bank
and Trust
Company dated November 22, 1988 relating to the Supplemental
Executive
Retirement Plan
|
|
Exhibit
volume, 1988 10-K
|
10(o)
|
Harsco
Corporation 1995 Executive Incentive Compensation Plan As Amended
and
Restated
|
|
Proxy
Statement dated March 23, 2004 on Exhibit B pages B-1 through
B-15
|
10(p)
|
Authorization,
Terms and Conditions of the Annual Incentive Awards, as amended
and
Restated November 15, 2001, under the 1995 Executive Incentive
Compensation Plan
|
|
Exhibit
volume, 2001 10-K
|
10(r)
|
Special
Supplemental Retirement Benefit Agreement for
D. C. Hathaway
|
|
Exhibit
Volume, 1988 10-K
|
10(s)
|
Harsco
Corporation Form of Restricted Stock Units Agreement
(Directors)
|
|
Exhibit
to Form 8-K dated April 26, 2005
|
10(u)
|
Harsco
Corporation Deferred Compensation Plan for Non-Employee Directors,
as
amended and restated January 1, 2005
|
|
Exhibit
to Form 8-K dated April 26, 2005
|
10(v)
|
Harsco
Corporation 1995 Non-Employee Directors' Stock Plan As Amended
and
Restated at January 27, 2004
|
|
Proxy
Statement dated March 23, 2004 on Exhibit A pages A-1 through
A-9
|
10(x)
|
Settlement
and Consulting Agreement
|
|
Exhibit
to 10-Q for the period ended March 31, 2003
|
10(y)
|
Restricted
Stock Units Agreement
|
|
Exhibit
to Form 8-K dated January 24, 2006
|
10(z)
|
Form
of Change in Control Severance Agreement (Certain Harsco Vice
Presidents)
|
|
Exhibit
to Form 8-K dated June 21, 2005
|
Director
Indemnity Agreements -
|
|
10(t)
|
A.
J. Sordoni, III
|
|
Exhibit
volume, 1989 10-K Uniform agreement, same as shown for J. J.
Burdge
|
″
|
R.
C. Wilburn
|
|
″ ″
|
″
|
J.
I. Scheiner
|
|
″ ″
|
″
|
C.
F. Scanlan
|
|
″ ″
|
″
|
J.
J. Jasinowski
|
|
″ ″
|
″
|
J.
P. Viviano
|
|
″ ″
|
″
|
D.
H. Pierce
|
|
″ ″
|
″
|
K.
G. Eddy
|
|
Exhibit
to Form 8-K dated August 27, 2004
|
12
|
Computation
of Ratios of Earnings to Fixed Charges
|
|
Exhibit
volume, 2005 10-K
|
21
|
Subsidiaries
of the Registrant
|
|
Exhibit
volume, 2005 10-K
|
23
|
Consent
of Independent Accountants
|
|
Exhibit
volume, 2005 10-K
|
31(a)
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant
to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit
volume, 2005 10-K
|
31(b)
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant
to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit
volume, 2005 10-K
|
32(a)
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
|
Exhibit
volume, 2005 10-K
|
32(b)
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
|
Exhibit
volume, 2005 10-K
|
Exhibits
other than those listed above are omitted for the reason that they are either
not applicable or not material.
The
foregoing Exhibits are available from the Secretary of the Company upon receipt
of a fee of $10 to cover the Company's reasonable cost of providing copies
of
such Exhibits.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
HARSCO
CORPORATION |
|
|
|
Date 3-13-06 |
By: |
/s/ Salvatore
D. Fazzolari |
|
Salvatore
D. Fazzolari |
|
President,
Chief Financial Officer
and
Treasurer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in
the
capacity and on the dates indicated.
SIGNATURE
|
CAPACITY
|
DATE
|
|
|
|
/S/ Derek
C. Hathaway
(Derek
C. Hathaway)
|
Chairman
and Chief Executive Officer
|
3-13-06
|
|
|
|
/S/ Salvatore
D.
Fazzolari
(Salvatore
D. Fazzolari)
|
President,
Chief Financial Officer,
Treasurer
and Director
(Principal
Financial Officer)
|
3-13-06
|
|
|
|
/S/ Geoffrey
D. H.
Butler
(Geoffrey
D. H. Butler)
|
Senior
Vice President - Operations
|
3-13-06
|
|
|
|
/S/ Stephen
J. Schnoor
(Stephen
J. Schnoor)
|
Vice
President and Controller
(Principal
Accounting Officer)
|
3-13-06
|
|
|
|
/S/ Kathy
G. Eddy
(Kathy
G. Eddy)
|
Director
|
3-13-06
|
|
|
|
/S/ Jerry
J. Jasinowski
(Jerry
J. Jasinowski)
|
Director
|
3-13-06
|
|
|
|
/S/ D.
Howard Pierce
(D.
Howard Pierce)
|
Director
|
3-13-06
|
|
|
|
/S/ Carolyn
F. Scanlan
(Carolyn
F. Scanlan)
|
Director
|
3-13-06
|
|
|
|
/S/ James
I. Scheiner
(James
I. Scheiner)
|
Director
|
3-13-06
|
|
|
|
/S/ Andrew
J. Sordoni, III
(Andrew
J. Sordoni, III)
|
Director
|
3-13-06
|
|
|
|
/S/ Joseph
P. Viviano
(Joseph
P. Viviano)
|
Director
|
3-13-06
|
|
|
|
/S/ Dr.
Robert C. Wilburn
(Dr.
Robert C. Wilburn)
|
Director
|
3-13-06
|